Entrepreneurs who temporarily want to have a little more money can opt for a bank overdraft. With this, the entrepreneur can also be in the red. If you want to know whether this credit is the right form of financing, it is advisable to carefully read the information on this page.
What is a bank overdraft?
A bank overdraft is a business credit that can be drawn freely. This allows the entrepreneur to be overdrawn on the payment account. The lender and the entrepreneur agree a limit on this credit. Within that limit, money can be withdrawn and deposited at any time.
The extra financial space can be used for all kinds of purposes. Entrepreneurs often use the credit to invest in stocks, inventory and debtors.
Difference between a business loan and a current interest rate
The current account has a characteristic difference with a business loan: the amount of amounts that are booked back and forth. These are often small amounts on a current account. Amounts that are booked into this account are settled with each other continuously. For example, the entrepreneur has his own account paid by his company. That amount will be paid back to the private limited company by the entrepreneur in a short time. Small amounts of this kind are only advanced very temporarily. Therefore, a current account does not have a loan with interest.
The lender does not have to charge interest on amounts up to 17,500 USD. This only applies to amounts that are withdrawn or transferred to the current account. There is an important rule: no more than 17,500 USD may be in the current account throughout the year. As soon as the balance is higher, interest must be calculated, the tax authorities write.
Current account as a sole proprietorship
The definition of a current account is that amounts are posted back and forth more often. In sole proprietorships, this is mainly between the private account and the entrepreneur’s account. The amounts are always settled with each other.
In principle, the term only applies to legal entities, such as the director of a major shareholder (dga) at a private limited company. Different rules apply to sole proprietors. Sole proprietors process the private withdrawals and deposits in the records. These withdrawals must be reported annually to the Tax and Customs Administration. The entrepreneur does this through the income tax return.
Cost of overdraft
The entrepreneur can be overdrawn with an overdraft. This is subject to a limit agreed with the provider. As with a regular account, overdraft is not free. It costs the entrepreneur money. This is because money has to be borrowed extra, and to prevent overdrafts from becoming a bad habit.
A variable interest always applies to a credit and this is no different with a overdraft. The entrepreneur pays the agreed interest on the part of the credit limit that is actually used. This rate is usually based on the reference rate bank rate.
The interest consists of an average 1-month reference rate bank interest. This is calculated at the end of each calendar month. It applies to that month. The average 1-month rate can go up or down.
In addition, a variable surcharge applies: the lender determines the amount. The storage can change at any time. One reason may be that the lender estimates the risk of the financing higher.
A seasonal credit
Another option is a seasonal credit. This credit can only be used for part of the year. This is a kind of overdraft, but for a specific period of time.
An example: an entrepreneur needs credit in the period April – October. The rest of the year, the entrepreneur has sufficient own resources and there is actually no need to borrow. All kinds of contracts have to be renewed between April and October. Then the entrepreneur agrees with the lender that extra money will be available during this period by means of a seasonal credit. In November, the lender withdraws the credit: the entrepreneur has been helped and can get through the rest of the year. The entrepreneur then repays the money.