Overdrafts

• What is an overdraft?

  Withdrawing more cash than held in account
• Why might a business want an overdraft?

  To ease working capital concerns
• How is working capital calculated?

  Current assets minus current liabilities
• What are current assets?

  Short-term things you own
• What are current liabilities?

  Short-term things you owe
• Who are creditors?

  Suppliers you owe money to
• How does an overdraft help with unexpected expenditures?

  It provides immediate cash availability
• What type of finance is an overdraft?

  Short-term finance
• Why is an overdraft considered an external source of finance?

  It comes from a bank outside the business
• Why do new or startup businesses commonly use overdrafts?

  They often lack sufficient cash inflows
• What are the pros of using an overdraft?

  • Quick and simple to organize
  • Immediate availability once agreed
  • Can be tailored to business needs
  • No control of the business is given up
  • Not included in gearing ratio
• What is a key advantage of organizing an overdraft?

  It is quick and simple to arrange
• What does it mean that an overdraft can be bespoke?

  It can be tailored to specific business needs
• Why might a seasonal business benefit from an overdraft?

  It helps manage fluctuating cash flow
• What are the cons of using an overdraft?

  • Higher interest rates compared to loans
  • Bank can cancel overdraft at any time
  • Persistent use may ruin credit rating
• Why do overdrafts typically have higher interest rates than loans?

  Loans have agreed repayment schedules
• Under what condition might a bank cancel your overdraft?

  If there are persistent financial problems
• How can persistent overdraft use affect your credit rating?

  It may lead to higher future loan rates
• What could happen if you have a poor credit rating from overdraft use?

  You might be rejected for future loans
• What are the implications of a poor credit rating for a business?

  • Higher interest rates on loans
  • Possible rejection for future loans