Overdraft for business

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What is overdraft

Overdraft for legal entities and individual entrepreneurs is a form of crediting a current account. Literally means overspending. Allows you to spend more money than is on your balance.

How does overdraft work?

The company activates an overdraft, and the bank sets an available limit. Within this amount, the client gets the opportunity to use borrowed money if there is a lack of his own. That is, going into negative territory. If you have your own funds in the account, you will not be able to use the loan.

Repayment is carried out automatically when money arrives in the account. In this case, the entire debt or part of it is immediately written off, depending on the amount received. A certain period of time is given for repayment of the debt in full, most often it is 1-2 months. After the limit is restored, the overdraft can be used again.

Periodically, the bank increases or decreases the limit. The reasons for changes may be the active use of the service, payment discipline, an increase or decrease in turnover on the current account.

Interest is accrued only on the actual amount of debt for those days while the account was in the red. Some banks charge additional fees for limit setting or unspent overdraft funds.

What you can’t spend your overdraft on

The overdraft is intended to cover cash gaps and can be used for short-term commercial purposes, for example, paying salaries, paying taxes, paying rent, and settlements with counterparties.

You cannot spend credit funds in the following ways:

  • Transfers to other accounts
  • Loan repayment
  • Payment for banking services
  • Purchase of securities, bills, mutual funds
  • Withdrawing cash from your account
  • Providing loans or credits
  • Dividend payment
  • Making a contribution to the authorized capital
  • Collection payment
  • Payment for participation in tenders and auctions
  • Repayment of overdue debts to the budget

Types of overdraft

There are several types of overdraft:

  • Classical. Issued based on the company’s turnover in the bank on its current current account. Its size on average is 30-50% of the average monthly turnover
  • Advance. Provided to large companies with stable financial flows in the amount of turnover for one month
  • For collection. Available to companies that actively deposit cash proceeds into the account if it amounts to 60-70% of the total funds
  • Technical. An unresolved debt arising due to the peculiarities of conducting currency transactions. Must be repaid within a few days or face heavy fines
  • Collateral. The organization provides liquid property as collateral in order to obtain more favorable lending conditions. Classic types of overdraft are provided without collateral

Who is the overdraft suitable for?

An overdraft can be issued for an LLC, individual entrepreneur or other types of commercial organizations. Particularly relevant for small businesses at the stage of development of entrepreneurial activity. The program is simple to complete—no need to submit financial statements or other documents. The assessment of solvency is carried out based on the organization’s turnover in a given bank, and documentation is provided when opening a current account.

You can get a loan quite quickly; in most cases, you do not need guarantors or collateral. This is extremely important in an emergency situation when money is needed urgently. In addition, you can take out an overdraft in advance and use it only when necessary. Payment will only be made for actual consumption.

It is not wise to use overdraft funds for long-term investments. Repayment occurs within 1-2 months, it will not be possible to recoup investments so quickly; you will have to cover the debt with funds from the company’s turnover.

Conditions for obtaining an overdraft for business

You can apply for an overdraft online. Many banks offer this opportunity immediately upon opening a current account. Or later an approved limit offer appears in Internet Banking. Loan rates and amounts are set for each client individually.

Frequently asked questions and answers

What collateral must be provided?
In most cases, an overdraft is an unsecured loan. But some banks offer special programs with collateral, under which you can get a large amount for a long period at a low rate. It is also possible to provide a guarantee on an individual basis. Most often, business owners act as guarantors.

How to get the maximum limit amount?
The overdraft limit directly depends on the company’s current account turnover. You cannot request a maximum loan amount. The bank will analyze movements in the account and set an allowed threshold. Also, a credit institution can revise the established limit and increase it if the company begins to receive more funds or actively uses the service.

For what period is the overdraft provided?
The credit limit is set in most cases for 12 months. This means that after a year the bank will reconsider the terms of the overdraft. The term of the loan itself is 30-60 days. Each tranche received must be repaid in full within the specified time. Then the money can be used again.

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