What is a commercial overdraft protection, and why would you want one? Interestingly, you, along with the majority of UK businesses have probably agreed terms of a commercial overdraft with your Bank.The reason that you did this was that it offered you a convenient and simple way to purchase goods, pay staff, or finance any other form of payment to aid the smooth running of your company.
Is there a down-side to commercial overdrafts?
Well, simply stated, whilst an overdraft does give you instant access to cash, it is an expensive method of financing your cashflow. Overdraft facilities are pre-agreed on a rate that follows the Bank of England base rate, and assessed via a template. Ther measurement combines: credit risk, securitisation, and the age and type of business applying for the facility. An average commercial overdraft will run at around £80-100,000 and cost around 2-3.5% per base. For a smaller business these rates increase to anything between 3-7% over base. Whilst companies with very large facilities will be measured differently, and rates are often found to be lower.
How commercial overdraft protection works?
In most cases, businesses run their overdraft facilities as if it were an unsecured loan. This is because for practical reasons you dont have to request money from your Bank each time you need it, and therefore availability of cash is instant. Simply stated, an overdraft feels like an unsecured loan. The reality is that overdrafts are almost always secured against some form of asset. This may be any one or all of: Directors Personal Guarantee; Debt Ledger; Property and assets either owned by the company, the Directors, an external Guarantor, or all of the above.
Alternative Methods Of Maintaining Positive Cashflow
Today, there are many options available to provide UK PLC with a positive cashflow. Many of these solutions offer enhancements over the traditional overdraft facility. These solutions often remove the stress and time-consuming elements of collecting invoice debt, whilst providing instant access to an enhanced level of funding, and reduced cost loans. Particularly approproate for your small and medium sized enterprise, invoice factoring solutions provide a cost effective and flexible alternative.