3 Reasons Your Business Needs Overdraft Protection
From covering cashflow gaps to accounting for unexpected expenses, overdraft protection can become an essential part of safeguarding your business's finances.
Suppose you wrote a check to a material supplier last week, and unfortunately, the accountant was out sick that day. Meanwhile, you forgot about the check, using your business checking account to make your everyday transactions. The check clears weeks later, and now you are hit with a hefty fee.
With overdraft protection, you could have avoided this hassle, and such a simple mistake wouldn’t have to derail your business operations.
Overdraft protection is a form of credit that the bank extends to business owners to protect them from hefty fees and assist with their operations’ seamless running. When a business writes a check for more than the amount available in the account, this triggers overdraft fees which can snowball, costing the business many times over.
With overdraft protection, the bank will automatically “loan” the business money to cover the check’s amount when the account does not have sufficient funds to cover it. Typically, the bank will then charge the business a fee of $35 for this service.
Benefits of Overdraft Protection:
1. Prevents Embarrassing Declines
If your salesperson is taking a client out to dinner and there are insufficient funds in the account due to a bookkeeping error, overdraft protection will cover the transaction instead of having your company’s card decline in front of your potential client or vendor.
Few things are more embarrassing than giving your business card information to a vendor only to have them call back and tell you that your card declined.
2. Covers Financial Gaps
Small businesses often run on thin margins, and overdraft protection can cover you if you need extra cash in anticipation of income. Perhaps you have an invoice that you expect payment for, but the payment is still days away. You need to pay the utility bills or buy supplies, yet funds are low. Overdraft protection can kick in in an emergency, providing you with the cash you need.
3. Covers Unexpected Expenses
In another scenario, a heavy storm causes water to leak from the roof, leaving your showroom a wet mess. Paying for a contractor to come in and take care of the damage will cost you, but you will still have to pay your employees and your expenses. Overdraft protection will allow you to write the check to the contractor while still keeping your business running.
Overdraft Fees and Small Businesses
While many business owners use overdraft protection to keep their business afloat even when they are low on cash, it is not a magic pill. Each transaction carries a fee, and those fees can add up quickly if you use the service frequently. For instance, taking a client out to a $40 lunch can easily end up costing $75 once you factor in the cost of overdraft protection.
Some banks only charge the overdraft fee if the transaction is greater than $5, which saves you from being hit with $35 in extra fees for miscalculating a dollar here and there. Other banks have a daily limit of how much they will charge in fees, which is particularly helpful to small businesses.
Still other banks allow you to link a credit card or a savings account to your main account and will draw from those in the event of an overdraft. Those transactions’ fees are usually much smaller, making them a better fit for businesses on a budget.
When it comes to protecting your business’s finances, overdraft protection can give you a safety net in an emergency. Overdraft protection will grant you “leniency” for small accounting errors and provide you with the extra cushion you need in lean times. Many small businesses find overdraft protection a necessary part of overall financial management.