cashflow
Overdraft / Credit Line
Pre-approved short-term borrowing facility - flexible cash buffer for working capital needs.
Definition
A credit line (or overdraft, in UK terminology) is a pre-approved borrowing facility from a bank. You draw what you need, when you need it, and pay interest only on the drawn balance. Typically used for working capital - covering short-term cash gaps between paying suppliers and collecting from customers. Pricing: typically prime rate + 1-4% for established small businesses. Discipline: a credit line is for short-term gaps, not for funding losses. Used to cover ongoing losses, it converts a working capital tool into a death spiral.
In your business
- →Establish a credit line when you don't need it - banks lend to businesses with cash, not businesses without
- →Use the line for short-term gaps, never to fund ongoing losses
- →Pay it down to zero periodically - perpetually drawn lines signal trouble to lenders