An overdraft facility is a revolving loan. It is an agreement by the Bank to allow a customer to overdraw his current account up to an agreed limit (known as the Overdraft Limit) at an agreed interest rate.
By: Hitesh Khan/
Most lenders offer the options of personal loans or overdrafts to borrowers. The borrower has the option to choose between either of these two.
An overdraft facility is flexible and convenient cash you have at hand for that emergency. As s customer of overdraft facility, you can repay it in any amount, and as and when you have the funds. You may withdraw on the overdraft facility account when it is restored, wholly or partially, upon repayment.
Interest accrues in the overdraft facility only when the account is actually overdrawn and is charged on the daily overdrawn balance of the account.
Loans on the other hand, are longer term structured arrangements which will see you receive an agreed amount up front in return for paying back an agreed monthly figure for a set period of time. Normally the loan is not flexible so the funds you receive on day one will not be increased. This type of finance is very useful for long term planning but should not be used as an excuse to overspend in the future.
Generally an overdraft facility attracts a much higher rate of interest and if you actually go over your agreed overdraft limit the charges can be excessive to say the least.
One most important thing to remember is, never treat an overdraft facility as your personal piggy bank as it should only be used for short term funding requirements and not long term financing. You should opt for a personal loan when you want to make a fixed installment payment.
While an overdraft facility allows for credit to revolve, the period of repayment for personal loan is fixed and has to be repaid over a prearranged period of time.
But a Business Overdraft Facility is different and is useful especially for business growth and expansion because it allows for collateral-free financing – sometimes of up to $200,000 – and gives you access to funds whenever you need it. With a Business Overdraft Facility you pay interest only on what you use and you also have convenience of a chequing facility.
An overdraft facility is arranged with the lender in advance and is then available for you to use when you need it. An overdraft gives your business financial flexibility by assisting with working capital, managing seasonal fluctuations or covering short term cash flow requirements.
Interest on business overdraft facility is usually calculated on a daily basis so you only pay debit interest on the balance that is overdrawn. But be mindful that overdraft facilities are usually subject to an overdraft set up fee.
The lender usually will review your business overdraft facility, every few months and charge an annual renewal fee. Whether the lender provides you credit depends on your circumstances, and it is subjected to their lending terms and condition.
A business overdraft facility is often repayable on demand. This means you will have to repay the overdraft in full when asked to do so. Sometimes, you may need to provide security for overdrafts.
Mr Paul Ho, chief mortgage consultant at iCompareLoan said, “businesses ought to consider business overdraft facility as they need to borrow when they do not need money.”
He added: “When your business is struggling and you need additional funding to tide over a tough patch, then you will find that your access to funding is completely cut off and end up with very expensive funding.”
It may be wise to plan 6 to 12 months ahead for any potential funding needs. Even if you do not need funding now, you may want to quickly refinance your home loans for any potential equity and stand-by cash even if you do not need it now.
Remember, banks assess your credit and affordability at the point of application, so you should apply when your status is good, not when you have further deteriorated. At that time, no banks will lend you.
You can read more about the different types of funding here. If your business is profitable and you only need short term funding, but your access to bank’s working capital is temporarily cut off, then you should consider personal loans as a source.
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