Overdrafts are granted to a business by its bank. An agreed overdraft limit is set and this can be varied over the life of the business. Overdrafts can either be for a fixed period or provided on a rolling basis.
The bank will consider various factors in agreeing an overdraft facility, such as the length and history of the business relationship as well as the turnover, profitability and asset base of the company. A well run business current account will be key to their decision and may influence the interest rate offered.
Applications are made to the business’s bank either in person, by telephone or online.
Overdrafts can be either authorised or unauthorised, although the latter is probably best avoided if possible as the charges and default interest rate for using an unauthorised overdraft can be punitive.
The relationship with a business’s bank can be tainted if it does not operate within its agreed overdraft facility and this is likely to affect the bank’s decisions on whether to afford additional credit facilities, e.g. loans, overdraft extension in the future.
A business will have a better chance of be able to extend its overdraft facility if it has a history of operating within its agreed facility. It is also important that any banking covenants are complied with, as failure to do so may result in the bank withdrawing financial support and cause going concern problems for the business.