What is an overdraft?

What is overdraft?

An overdraft is a contiuous loan linked to a checking account at a bank. On that account, you are allowed to be in debt up to a certain amount. That is the credit limit. With an overdraft, you decide when and how much of the limit you use. You only pay interest on the amount you have withdrawn. Are you borrowing from a lender who is not a bank himself? Then this form of financing is often called a flexible credit.

What can I use an overdraft for?

An overdraft is useful when you temporarily lack the cash flow to cover ongoing expenses. For example, due to a seasonal pattern in your sales, peaks in purchasing, or unexpected and expensive maintenance on a machine. Are you going to make a major investment? Then a business loan or leasing are better options.

Costs of an overdraft

With an overdraft or business credit, you pay interest on the amount you use. For example, you have a credit limit of €10,000 and you use €2,000 of that. Then you pay interest on that €2,000. The interest rate you pay depends on the financial health of your business. With an overdraft, you also pay service charges. This is a fee the lender charges for keeping the money available for you. Check the costs charged by the lender before taking out an overdraft.

Duration and flexibility

An overdraft allows you to withdraw and deposit money whenever you want. This makes it a flexible way to increase your available working capital. You do not have to apply for a new loan every time.

The lender periodically checks whether you are using the credit as agreed. You may no longer qualify for the credit. You then pay off the outstanding amount in full. If you exceed the credit limit, the lender may charge penalties and additional fees. The bank can withdraw an overdraft at any time if you do not comply with the terms and conditions.

For whom is an overdraft interesting?

An overdraft is suitable for businesses facing temporary liquidity problems. When you do not have enough money to pay the bills at certain times. For example, when buying stock for the upcoming season. You can use an overdraft for stock financing, debtor financing, or financing unexpected expenses.

Apply for an overdraft

You ususally apply for an overdraft online. Before submitting an application, check what information the lender wants from you. Also check what the lender will look for in their assessment and what the costs are. To apply for an overdraft, use the following steps:

• Determine the amount: decide how much funding you need.
• Choose a bank: choose another bank if you do not like your own bank's offer.
• Collect documents: banks ask for company details, financial statements and, for example, additions and write-offs.
• Apply online: complete the questions online and submit the infomation.
• Assessment: the bank will assess your application, and check the financial health of your business and your creditworthiness.
• BKR review: often a BRK (Bureau Kredietregistratie) review follows to check your credit history.
• Approval and signature: read the credit agreement carefully. Ask questions if something is not clear and sign the agreement if you approve it.

Help with business financing

KVK’s Financing Guide helps you find your way in financing your business. Do you still have questions? Call the helpline on 088 585 11 11 or ask an expert.