Used with the right purpose, both credit card and overdraft facility assist in helping your business get through any financial constraint you’re currently experiencing. But is one cheaper than the other? First, you must know the differences between each so you don’t run into unnecessary fees or charges.
Let’s check out both options for your finances.
Credit Card
For credit cards, it is possible to avoid charges and interest based on how your business spends as well as the type of credit card you use. What is great with credit cards is that as long as you are paying back your balance fully each month, you won’t pay any additional charges or interest.
Most credit cards offer 0% interest rates just as long as you are paying the minimum on time. But whether you get a low-interest rate depends on your lender as well as your credit history. Often times those who proved to be responsible when borrowing in the past are the most likely to acquire this type of card.
A credit card can have a positive impact on your businesses’ credit history when used right. A credit card also allows you to spread the payment’s cost, which is handy if you don’t have the full sum to spend there and then. However, it is important to pay the minimum monthly since failing this can damage your relationship with the lender and your credit rating.
Overdraft
In many cases, most banks offer overdraft facilities on current accounts. Utilized properly, overdraft will add a level of flexibility to your finances while being a short-term way to cover your payments and purchases.
Overdraft offers safety for businesses that spend or withdraw more money than available in the account. It enables you to borrow money through your account to a certain limit, with no set repayment date. Some overdrafts can be interest-free, but often banks will charge interest on the amount borrowed. Interest rates are typically variable.
It is wise to shop around and see whether your preferred banks offer an interest-free buffer. Arranged overdraft setups allow businesses to spend up to an agreed limit. After going over this charge, you will then be charged fees and interest for using the overdraft. This generally includes a usage fee for every day overdrawn.
These charges will depend on your bank as well as the amount and duration overdrawn. In many cases, a higher balance means a larger daily fee. These charges are sometimes capped when a set amount is reached.
So, Should You Choose A Credit Card Or Overdraft?
The most suitable option will ultimately depend on your spending habits and the reasons why you are borrowing in the first place. If you are planning to borrow over a longer period, choosing a credit card may be the right option.
In contrast, if you find yourself short one month by only a small amount, choosing overdraft may be the right choice. Take note that while a credit card can provide a positive impact on your credit history and a negative one, bank overdraft only affects it negatively.
End Note On Credit Cards vs Overdrafts
Borrowing money is rarely a good idea for businesses unless you are doing it to build relationships and creditworthiness. Before you apply for a bank overdraft, weigh up all the pros and cons first. And don’t forget to exhaustively research your preferred overdraft lender before committing with them. This way you can make the best decision for your business finances.
