This is the most common form of finance used to fund working capital and the one with which most business owners are familiar. This is where the bank account is allowed to go overdrawn up to a pre-agreed limit.
Overdrafts are straightforward to arrange and are provided by most banks. The limit will be set at a figure appropriate for the business and at a level where the bank considers the risk to be acceptable. The actual amount available will therefore vary significantly from business to business. Security may or may not be required.
Generally this type of facility is reviewed by the bank at least once a year at which time they will require up to date financial information – this may include some or all of the following:
- Audited Accounts
- Management Accounts
- Detailed and aged list of debtors and creditors
- A cash flow forecast
Assuming that the overdraft facility is a true working capital facility then the bank will expect to see the account fluctuating across the full range of the borrowing limit and quite possibly with occasional swings into credit.
If the facility has been used to fund the purchase of assets or the business is trading at a loss then it is likely that this will be evidenced in the operation of the bank account. The overdraft limit may be insufficient and what is called ‘hardcore’ borrowing may have emerged. The hardcore element of the borrowing is usually considered to be the level at which the borrowing does not fall below. For example a business has an agreed overdraft limit of £10,000 and during the last year the account has fluctuated between a minimum of £5,000 overdrawn and the £10,000 limit. The bank will consider the hardcore borrowing to be £5,000 and may wish to transfer this sum to a loan account where it may be repaid over a period.
Clearly one distinct advantage of funding the working capital requirement via an overdraft facility is that interest charges are only incurred when the facility is actually used. Thus if the account remains in credit then no interest charges will be payable. An arrangement fee will be payable at the outset and then each time the facility is reviewed – usually once a year. Fees vary from bank to bank and are typically from 1% to 2%. A disadvantage therefore is that if an overdraft facility is arranged but not used then a fee will still be incurred.
A rapidly expanding business could easily out grow its overdraft facility and find itself constantly close to the agreed borrowing limit. As there will always be a finite amount of money that a lender can provide, this in itself may be a restricting factor in the growth of the business. In this situation it will be necessary to consider and explore other types of finance.Immobilienmakler Heidelberg Makler Heidelberg
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Source by Steve Jones