Background

Overdraft

THE PROS & CONS: OVERDRAFT

A short-term form of debt to help cover the costs of generating sales, prior to receipt of payment for those sales. Normally used when selling on trade credit and to help pay direct costs of production (ingredients, wages, packaging etc.) as well as fixed costs (rent, rates, insurance etc).

Generally agreed by banks for 12 month periods subject to annual review, to cover the peaks and troughs in the business cash flow cycle, but can also be arranged for one-off, much shorter periods for more specific requirements.

PROS

CONS

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Short-term

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Interest is only paid when the overdraft is being used

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Very flexible

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Arrangement fees for 12 month term even if facility only used for half that period

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Annual renewal fee

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Need discipline to avoid the temptation of using for wrong purposes