What is an overdraft?

  • KVK Editors
  • The basis
  • 12 November 2024
  • 1 min
  • Managing and growing
  • Finance

If you need extra money for your business to cover existing expenses, you can apply for an overdraft, also known as business credit. You then have a business account from which you can withdraw money up to a certain amount when you need it. Read more about overdrafts here.

Overdraft

An overdraft is linked to a bank account. You can be in debt on that account up to a fixed amount. That is the credit limit. You can withdraw money from the account up to the fixed limit and use it to make payments. You decide when you do so and how much to withdraw. You only pay interest on the amount you have withdrawn. Every month, you pay off part of the overdraft debt. You can withdraw money again when you need it.

What do you 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 beforehand. 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.

Applying for business credit

You often apply for an overdraft online. Before you apply, check what information the lender wants from you. For example, company details, annual accounts, and bank statements. Also check what the lender will look for when considering your application. 

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.

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