A bank overdraft is where you exceed your bank account balance by a certain amount. It is a situation where your bank account balance runs into the “negative”.
Let us say your bank account has 10,000 shillings, but you ask your bank to withdraw more than your existing amount. So, you end up withdrawing 15,000 shillings. Your account balance will be – 5,000 shillings.
Most SMEs are fond of asking for overdrafts from banks. And banks love it because (1) there is an interest involved. Sometimes huge interests, and (2) you will somehow be tied to the bank as you strive to pay.
Overdrafts might seem convenient but might be the end of your business. With a huge overdraft on your account, you might as well say goodbye to cash flow in your business.
An overdraft is like a hole. The “beauty” about this hole is that every time you fill it, you are allowed to dig out some more. In most cases, you will never be able to fill it to the brim so you have some overflows.
Overdrafts are worse than loans, especially if your cash flow is unstable. They are tempting but a trap once you are in. Do not let the sweet language and the broad smile of your banker throw you into a bottomless pit that you will never come out of.
If you must have an overdraft tied to your business account, then make sure that it is an amount that you can afford to pay within the shortest time possible and be done with it. Do not make it a habit for once you start, you will never go back.
Am not saying that you shouldn’t take overdrafts. What I am saying is only take overdrafts if it is really necessary and if you know that it will not be something that you will always do.