Overdraft

Overdraft – rather new, dynamically developing product in a segment of financing of small business. It has both advantages and shortcomings about which we will tell below, and we will begin as always with the theory.

The term an overdraft occurs from the English word overdraft that in transfer means an overexpenditure. The overdraft is a crediting of the settlement account of the organization for payment of operating costs at insufficiency or lack of own funds of the organization on this settlement account. This product is positioned as short-term and is calculated first of all on a covering of short-term cash gaps (gaps in a payment turn) at the companies or monetary gaps (from a salary to a salary) at individuals.
Terminology of this product includes some more concepts:

Overdraft limit – the maximum sum on which the company borrower can прокредитоваться («to leave in a minus») at any moment during all term of an overdraft. In fact it is a ceiling of the current debt on reaching which the bank stops payment of payment orders of the borrower while that in turn won't extinguish a part of debt. Рачитывается on the basis of average monthly turnovers of settlement accounts. After overdraft opening the bank obliges the company borrower to support turnovers of the settlement account in the sum of 200 % from an overdraft limit. If this condition isn't carried out, the bank can lower a limit. The bank also can increase over time an overdraft limit if turnovers of the settlement account increase.
Term of a limit of an overdraft – term on which settlement account is transferred to an overdraft mode. After this term the contract офердрафта loses force. For further use of an overdraft it is necessary to sign the new contract with bank. Thus the analysis of business of the company borrower and all procedure of registration of an overdraft will be newly made. Term of a limit of an overdraft usually makes 12 months or less depending on bank and from requirements of the company borrower.

Overdraft term – the maximum term on which the company can «leave in a minus» on each concrete tranche. For example, if to you approved a limit of 500 000 dollars, the first time you used an overdraft of the 1st date for the sum of 200 000 dollars, from this date term counting офердрафта on this tranche went. You are obliged to extinguish these 200 000 dollars before the expiration of this term. However if you support turnovers of the settlement account of 200 % from an overdraft limit, this tranche will be in any case extinguished current month. Simply because to you into the account should arrive 1 000 000 dollars. And any receipts on the settlement account are automatically written off in repayment of the current debt on an overdraft. So it turns out that term of an oborachivayemost of each tranche doesn't exceed the 1st month. In any case it is desirable «to go to plus», i.e. completely to repay debt on an overdraft with periodicity not less often than the period equal to term of an overdraft. For example the overdraft is approved with term of a limit of 6 months, and term of an overdraft makes 2 months, then it will be necessary to go to plus 3 times within 6 months every 2 month from the date of overdraft registration.
Need for "supershort" money arises at the companies during the moments of large payments to suppliers, salary payments to employees, rent payments etc. In principle the overdraft is necessary at any hung "inconvenient" payment. Such situation arises, for example, when the main operating costs (a salary, rent etc.) are made at the beginning of a month, and receipt from buyers/customers – at the end, and available current assets are enclosed in the goods, payment of additional services or in development of the new direction of business (purchase of the equipment, a room etc.).

In a similar situation the overdraft allows to make operatively operating costs in necessary volume not to get to disgrace to exacting suppliers or lessors and not to face a strike of the employees.
One more favorable advantage of an overdraft is the system of charge of percent (the rate as a rule makes 14-16 % per annum). Percent are charged only for actually used credit money and for that term which they were used. The matter is that in the accounting of bank the overdraft is considered as a peculiar line of credit therefore everyone used by the company the borrower the sum of an overdraft is meant by bank as the separate short-term credit with charge of percent for this sum and for term of its actual use. On monthly results percent are summarized and paid in a certain day of every month irrespective of repayment of "body" of an overdraft. The company can be in a minus for all sum of a limit. In this case in day of repayment of percent the employee of bank reports the sum necessary to payment, and the company borrower brings (or lists) it the same day. The sum which has thus fallen to the account will be written off first of all in repayment of percent. If the sum exceeding the sum of added percent falls to the settlement account, the rest will be written off on repayment of the principal debt (on a "minus" covering).
At overdraft registration the bank first of all is guided by monthly cleared turnovers of the company of its settlement accounts. At all without having the settlement account in this concrete bank the company can issue in it оведрафт. Thus the bank will consider as settlement base turns in other banks, and will establish the maximum limit of an overdraft within 30-40 % of these turns. If turns are carried out according to the settlement account in creditor bank, he will establish a limit within 40-50 % from these turns. Also the bank can demand transfer of turns from other accounts on a current account from itself and maintenance of these turns at a rate of 200 % from the approved limit of an overdraft. It can be made the demand to conclude the agreement on write-off of money without acceptance from company borrower accounts in other banks. Then the bank will acquire the right, in case of not executions by the borrower of the obligations on a current account, to write-off money of the borrower in other banks.

The last requirement partially compensates to bank the main risk is not repayment of the loan in the absence of receipts on the overdraftny settlement account. This risk also compensates bank by carrying out the careful analysis of movement of turns for the last year. If in business it is observed strong difficult prognoziroyemy fluctuations of turns, an overdraft of this company most likely will refuse. Similar turns are generally observed at seasonal business, and also at work from the order when to firm one order in two-three months and the most part of this order arrives is paid by the customer in a certain day at a time. Also the bank will consider a diversification of sources of receipt of funds on accounts. If at the company is one-two buyer/customer which pay with a payment delay, to this company also can refuse an overdraft since the risk of loss of liquidity because of a payment delay from the buyer monopolist is very great.
The company borrower with rather active movement on accounts has a complexity of tracking of overdraftny loans. The majority of banks didn't include in system bank client (Internet bank) data on a condition of debt on an overdraft. In this case it is necessary or to keep the detailed accounting of receipts, expenses and loans independently, or often to call up to the bank employee (the expert, the operator) to learn from it the current rest of debt on an overdraft.

It is interesting!:
There is an alternative of an overdraft in the interbank market is the credit «овернайт» (for one night). Banks use "supershort" loans at the Central Bank for a covering of operative gaps in a payment turn.