Lorem ipsum
Lorem ipsum
More control and less work. Even in your industry.
Fast and secure invoice processing for every organisation.
Fast and secure invoice processing for every organisation
The possibilities of our platform
The business overdraft meaning refers to a short-term credit facility that allows a company to withdraw more money from its current account than is available, up to an agreed limit. This type of credit offers flexibility in managing internal debts and receivables, especially between a business and its director.
In this article, you’ll learn what a business overdraft is, how to reflect it in your balance sheet, and when it’s a smart financing option for your business.
Table of contents:
The definition of overdraft in business involves a revolving credit facility that records internal financial transactions, such as those between a company and its director. This arrangement enables easy balancing of debts and claims without requiring new loans.
A common form is the business overdraft, which lets a business overdraw its business account with overdraft up to an approved limit. It is ideal for short-term liquidity shortages caused by seasonal fluctuations or unexpected costs. Interest is only paid on the amount used, and the business can freely withdraw or repay funds within the given limit.
The business overdraft will appear on the balance sheet depending on whether the account is in credit or overdrawn. A positive balance is recorded under current assets on the asset side of the balance sheet. A negative balance (overdraft) is recorded under current liabilities on the liability side. This distinction is vital for accurately presenting the financial position of your business.
Example of a balance sheet with a positive business overdraft balance:
| Assets | Amount (£) | Liabilities & equity | Amount (£) |
|---|---|---|---|
| Fixed assets | Equity | ||
| Property | 150,000 | Share capital | 100,000 |
| Equipment | 20,000 | Retained Profit | 25,000 |
| Current assets | Current liabilities | ||
| Inventory | 10,000 | Trade creditors | 8,000 |
| Trade debtors | 12,000 | ||
| Bank account | 25,000 | ||
| Business overdraft | 5,000 | ||
| Mortgage loan | 89,000 | ||
| Total Assets | 222,000 | Total liabilities & equity | 222,000 |
Example of a balance sheet with a negative business overdraft balance:
| Assets | Amount (£) | Liabilities & Equity | Amount (£) |
|---|---|---|---|
| Fixed assets | Equity | ||
| Property | 150,000 | Share capital | 100,000 |
| Equipment | 20,000 | Retained profit | 30,000 |
| Current assets | Current liabilities | ||
| Inventory | 10,000 | Trade creditors | 8,000 |
| Trade debtors | 12,000 | Business overdraft | 5,000 |
| Bank account | 25,000 | ||
| Mortgage Loan | 74,000 | ||
| Total assets | 217,000 | Total Liabilities & Equity | 217,000 |
A business overdraft is particularly useful for companies facing:
It offers quick access to capital without the delays of loan applications. However, it’s important to understand the disadvantages of overdraft in business, such as higher interest rates, limited borrowing amounts, and potential reliance on overdrafts as a structural financing solution.
Payt gives you control over your credit management and financial administration. Our accounts receivable software ensures invoices are paid faster and helps you make informed decisions about using or reducing your business overdraft.
Benefits of Payt:
Want to strengthen your financial position? Download our brochure or book a free demo.
Yes, when a company is overdrawn, the business overdraft is recorded as a current liability on the balance sheet.
It is a credit facility linked to a business bank account that allows the company to withdraw more than the available balance, up to a set limit.
The amount depends on agreements between the business and its bank. For larger sums, interest and other terms may be subject to additional regulation.
You can reduce or repay your overdraft by depositing funds back into your account, either in one go or in installments, depending on your cash flow.
