Advantages and Disadvantages of Bank Overdraft

 Bank overdraft is a temporary borrowing facility for businesses and companies to meet their ultra-short-term cash shortage or requirement. Your bank in Hudson, WI, and Stillwater, MN, offers this facility to your current account for a fee or interest to help you manage your cash flow more flexibly. It comes with a set limit, withdrawn for a specific duration against an interest rate.

Your bank in Stillwater, MN, / Hudson, WI, sets the limit based on the amount of working capital, your creditworthiness, and the security offered by you. You cannot consider it a long-term funding option like a loan or mortgage in Hudson/ Stillwater as it's likely to cost you more in the long run. Before doing ebanking to apply for an overdraft facility as a financial option in Hudson/Stillwater, check out its advantages and disadvantages.

 

Advantages of Bank Overdraft

●     Flexibility

You can use this borrowing facility of your bank in Stillwater, MN / Hudson, WI, any time, for any amount (up to the limit assigned), and for even less than one or two days. It is far more flexible than getting a loan.

●     Less Paper Work

Bank overdraft facility does not require a lot of paperwork to avail them. Unlike long-term loans, an overdraft is easy to avail.

●     Timely Payments

When you lack sufficient balance in your business account, a bank overdraft facility allows you to make timely payments in Stillwater, MN / Hudson, WI. It helps you avoid late payment penalties in your business.

●     Keeps Good Track Record

Consider a scenario - you gave a check for a specific date to your supplier for payment based on money due from your debtors. For some reason, the money from debtors got delayed. A bank overdraft facility allows better payment history covering the financial gap without bouncing your check due to insufficient funds. It keeps your financial track record sound.

●     Helpful in Managing Cash Flow Gaps

It is an excellent finance facility for businesses with higher cash flow movement in a given time frame. It resets a skipped cycle of cash flow rotation (inflow/outflow), allowing smooth management of cash flow gaps due to timing mismatch.

●     Benefits Less Interest Cost

When you take a business loan (for a fixed timeframe), you pay interest on it even if the money remains unused. Under the bank overdraft facility, interest starts with the amount overdrawn and instantly ends when you pay it off, giving you the benefit of less interest cost.

Disadvantages of Bank Overdraft

●     Risk of Reduction in Withdrawal Limit

Bank overdraft is like a temporary loan. In the case of poor performance or losses in business, your bank in Stillwater, MN/Hudson, WI, can reduce its limit or withdraw the facility, especially when the company requires it the most.

●     Higher Interest Rates

An overdraft facility comes at a higher interest rate than a business loan. If you exceed your overdraft limit without authorization, your bank can charge you, and you will have to pay an arrangement fee.

●     Risk of Seizing Business Assets

When you secure an overdraft facility against inventory or other collaterals like shares, life insurance policies, etc., you risk those assets for seizing on non-payment.

●     Lethargy in Collecting Debtors' Payments

Another negative side of having an overdraft facility is turning your business lax towards debtors. When you know you can cover the cash flow gaps with bank overdraft, you become lethargic in collecting money due from your debtors on time. 

Conclusion

Bank overdraft is an excellent facility to cover cash flow gaps in the business in Stillwater, MN / Hudson, WI. But, It comes at a high cost. Over-dependence on it for working capital financing indicates poor working capital management, causing liquidity constraints for the company. For long-term funding, look for other financing options.