German business account overdraft

Both as a founder and as an established entrepreneur, you are familiar with the situation: you temporarily find yourself in a financial bottleneck. Maybe a customer did not pay as expected, maybe you unexpectedly had to pay a large bill. To compensate for your bottleneck, you want to overdraw your account. If your business account has an overdraft facility, that shouldn't be a problem. This credit is specially designed to bridge short-term liquidity bottlenecks. However, it is also quite expensive and should therefore only be used temporarily and not in full. What, then, is the current account credit all about?

What is a current account credit?

The overdraft facility for your business account is similar to the overdraft facility for your personal account. It is an overdraft facility that you can use at any time. The prerequisite for this is that the bank sets up this overdraft facility. This means that the bank must allow you to bring your account into deficit up to an agreed contract. As soon as there is income on your account again, the current account credit is settled.

You pay interest for the duration of the drawdown and for the respective amount. This interest rate is relatively high compared to classic installment loans. Against this background, you should never use your current account credit permanently or to the full amount agreed with the bank. An overdraft facility is only a suitable form of financing for short periods of time and for small sums.

What are the differences between overdrafts and overdrafts?

An overdraft facility differs from a overdraft facility essentially only in the type of account for which it is set up. The overdraft facility is granted for the checking account of private customers. As a private customer, you usually receive regular income from a permanent employment relationship. The overdraft facility can be repaid from this income.

Pensioners or even unemployed persons can also receive a disbursement credit in an appropriate amount, because with the pension and the unemployment benefit there is a certain fixed receipt of money. However, the amount of the overdraft depends heavily on your regular income. Some banks grant a loan of two to three months’ income. As the overdraft facility is expensive, you should consider whether such a high credit line is really necessary or whether you would be better advised to take a smaller amount.

The current account credit is also a tolerated overdraft facility, but it is granted for your company account. The amount of the overdraft facility is again agreed with the bank and you pay interest for the drawdown. You pay interest according to the amount in which you have used the credit and according to the duration. It is calculated in days, so that you are billed exactly to the day. The interest rates for the overdraft facility or overdraft facility are relatively high by comparison. Although credit interest rates on the market have fallen steadily in recent years, some banks still charge double-digit interest on overdrafts. Interest rate cuts are therefore only very hesitantly passed on to private and business customers.

Typical transactions for which the current account credit is claimed are the purchase of goods by self-employed persons although there are still outstanding payments from customers or the use of a cash discount granted by a supplier. Paying wages and salaries to employees can also mean that the account has to be overdrawn when sales are not yet made.

Do founders get an overdraft?

Usually it becomes very difficult for founders to overdraw their business account. This is mainly due to the fact that the bank is not yet able to assess how a founder’s business will develop in terms of sales and profits. This makes it very difficult to assess whether the loan will be repaid. As a founder, you should also consider whether you want to get into debt at short notice in order to bridge a payment bottleneck.

What are the requirements for a current account credit?

As a self-employed person, you must expect to undergo an extensive credit check before your loan application is approved by the bank. The analysis of your creditworthiness is at the forefront of the credit check. The bank will check your creditworthiness on the basis of the last turnover and the profit. It will probably want to see your latest tax assessments, profit and loss accounts and balance sheets. For freelancers, the surplus income statement is sufficient. In addition, she will probably demand an extract from the Schufa to check whether you have fulfilled your payment obligations.

What are the costs for the loan?

Interest is charged for an overdraft facility, as for any other loan. These are calculated according to the amount over which you draw on the credit line. In addition, the length of the period for which you use the credit plays a role. The interest rates for the overdraft vary greatly among banks, but in principle they are significantly higher than the cost of an installment loan. Some banks even charge an interest rate in the double-digit range. This means that you as a borrower hardly benefit from the current low interest rates on the credit market for an overdraft. With this in mind, you should definitely compare the interest rates on this loan and also choose your corporate account based on the interest rate on the overdraft.

How to apply for an overdraft facility?

You apply for the overdraft facility for your account at your bank where you keep the business account. Before you apply for the credit, it is best to talk to your advisor and agree with him on the amount of credit that makes sense to set up. He will help you to set up the framework reasonably and also take into account the further development of your business. In this way, you can avoid having to submit another application for credit approval after some time.

On the one hand, the credit line should not be too high, so that your interest payments remain manageable. On the other hand, it should be set up in such a way that you can meet your payment obligations. It is best to agree the credit line with your bank at a time when it is not yet necessary. Then your creditworthiness will be better assessed and you will not be under time pressure to set up the credit line immediately. This will make it easier for you to negotiate with your bank. Your bank advisor will also explain what documents you need for credit approval.

What alternatives are there to the overdraft facility?

An interesting alternative to the overdraft is the microcredit. It is also intended to bridge short-term financial bottlenecks and is also issued only in a limited amount. Especially for founders, it is recommended to prepare a solid and well thought-out financial plan. If necessary, you can then take out a promotional loan. This financing is specially designed for founders and is significantly cheaper than an overdraft facility.

Conclusion: The overdraft facility is convenient but expensive

In principle, an overdraft facility on a business account is well suited if you need to bridge a liquidity bottleneck in the short term. It is granted as an overdraft facility for your business account and is used when you want to pay an invoice and there is no credit balance on the account. The next time money is received, the overdrawn account is cleared again. In this way, the overdraft facility increases your financial leeway.

However, it is a very expensive loan. Therefore, you should not use it in the long term or in the full amount, because there are cheaper loans with lower interest rates for this purpose. For founders, the overdraft facility is usually out of the question, because many banks assess creditworthiness very cautiously and therefore do not set up an overdraft facility.

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