Firstly, ask yourself:
- How will I pay my suppliers and workers if cash flow is weak?
- What quick funding options do I have if cash flow is tight?
- Is an overdraft line of credit suitable if my business is short on cash?
What is an Overdraft Line of Credit?
When a business pays for
a transaction and may not have enough funds in their account, the overdraft
line of credit covers the payment instead and avoids any negative impacts the
lack of cash flow could have had on the business.
For many businesses, cash-flow problems may be related to payment terms for services rendered, seasonal demand, late payments from clients or external forces unaccounted for (Pandemic) when forecasting one’s business cash flow.
Overdraft Line of Credit Pros and Cons
Here are the main pros and cons of an overdraft line of credit:
● Can cover expenses and emergencies - you can use an overdraft line of credit to meet expenses so that you don’t miss payments and bounce checks, so your debit card isn’t declined. Certain banks also let you draw on your line of credit when you require money for an emergency.
● Can boost your credit score - opening an overdraft line of credit can positively impact your credit score. This impact makes lines of credit suitable for individuals who are reestablishing their financial status or are starting. By reporting your monthly bills, you can help improve your credit score. Every time you complete a timely payment to your line of credit, the lender records this on your credit report.
● The fees are lower than an overdraft - using an overdraft line of credit is more advantageous than an overdraft, as the fees for using the line of credit are lower. Overdraft fees are typically approximately $35 per transaction, whereas the fee for a line of credit is considerably lower. Some lenders don’t charge any fees. If you pay the debt back on time, you will pay less than the typical overdraft fee.
● Masking an issue with the business -frequent use of this type of credit may be masking a real problem with the business. If there is a different issue such as not having enough customers, needing to rework the financials for the business, or dealing with costly overhead, a business line of credit might not be the right funding solution for the actual problem impacting the business's cash flow.
● Over-reliance on financial products - lending institutions may look at frequent usage of the line of credit negatively and opt to close the business's credit line due to overreliance on that financial product. If this happens, the business could struggle to come up with enough cash to manage the gap in their accounts.
● Must have a good financial standing - to be approved for a line of credit, the owner and any additional partners have to be in good financial standing. This financial standing would include having a good personal credit score, not having any other loans or financial products, and potentially providing proof of a good business credit score.
Ultimately, overdraft lines of credit are a useful financial tool for a business but can’t be used to manage a long-term financial weakness within a business.
What is overdraft protection and why you need it
Reducing business overheads and why you need to
Always having a cash reserve that you can use in an emergency is the name of the game. One way is to keep a constant eye on reducing business overheads as these overheads are often dynamic. You can use this to your advantage by adjusting how much your business actually needs to spend now as opposed to assuming what the business needed to spend in the past still applies in the present.
Here are some actions your business can take to lower business overheads:
● Moving the business to a smaller facility - if it's a business that uses a brick-and-mortar location, they may have to decide to downsize to save money on monthly expenditures specific to their facility.
● Changing monthly or annual services - which involves replacing those services with providers who charge less. This approach could be as simple as changing its Internet service provider or switching its email service host to a new company. Or, a business could pay an annual fee vs. monthly for a service to enjoy a higher percentage of savings on service.
● Shrinking the workforce - this choice is often the last resort because fewer employees may directly impact the type of service the business provides, business hours, and the ability to do behind-the-scenes work that directly affects the overall customer experience. These tasks could include but aren't limited to the following: restocking product, cleaning the facility, changing displays, and more.
Additional funding options could also include requesting funding from friends and family. This option has significant downsides, especially if the lender doesn't repay the loan. Regardless of the choice that a business owner makes, they have numerous funding options to consider, for example a revolving line of credit or business credit card funding.
Fundbox funding solutions
For entrepreneurs seeking access to lines of credit, Fundbox may be the resource for them. Fundbox provides lines of credit to qualified entrepreneurs seeking a short-term solution to a funding problem. Fundbox works with borrowers holding a FICO credit score of 600 or higher, at least $100,000 in annual revenue, and needing no more than $150,000 in credit. Read our expert review of Fundbox to find out more.