People often ask me how they can manage their working capital and cash flow in a more efficient manner. Sometimes, the best way to do this is via specific lending solutions that are designed especially with working capital in mind. Over the next few editions, I will provide a snap shot of four working capital solutions that may assist in alleviating cash flow pressure. This edition, focuses on the Overdraft.
The overdraft is the traditional method used to provide a buffer for known cyclical or unexpected cash flow events. The way it works is by placing a limit against your main business cheque account which allows you to overdraw your account up to the designated limit. For example, if you have an overdraft limit of $100,000 and your current account balance is zero, the overdraft will allow you to draw out up to $100,000 and therefore your account balance will be negative $100,000.
- Easy to use – Linked to your main business cheque account;
- Flexible – You can put money in and out as you please (within the overdraft limit);
- Long-term – An overdraft is usually a revolving facility which means that it does not necessarily have a fixed expiry date (although it may be subject to periodic review).
- Can become “hardcore” – Which means that the balance is no longer fully fluctuating which may indicate a difficulty in paying it off due to unforeseen or undiagnosed issues that may be affecting regular cash flow;
- Security – Usually an overdraft is secured against property (which may not be available to some borrowers);
- Higher costs – Rates tend to be higher for overdrafts and may have line fees associated with having the limit available, as the lender may incur a cost of allocating that particular capital to you. This means that you are paying for having the overdraft available regardless of whether you are using it or not.
When used correctly, the overdraft can assist businesses to overcome times of strained cash flow. However, if it is not the right solution for your business, it can become hardcore leaving you with a long-term debt that is not reducing and potentially incurring high interest and fee costs. This in itself can create and/or compound a cash flow issue and therefore it is important to ensure the suitability of this solution to your specific circumstances before it becomes part of the problem.
As always, if you need any clarification pertaining to the above, please get in contact especially if you don’t think you have the right facilities in place to suit your business’ cash flow requirements.
Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.