The use of overdraft or other short-term financing is part of the daily routine of many small and medium-sized businesses. At the same time, relieving the burden of expensive short-term loans by means of base financing would usually be the more favorable choice.
When the short-term loan becomes a long-term loan
The overdraft facility is intended as short-term financing in exceptional cases – yes, actually in emergencies. The interest rates are usually between 6 and 12 percent. In times of low interest rates for medium to long-term financing, it is surprising that the use of overdraft facilities is still standard practice for many companies. The short-term solution becomes the long-term and so often very expensive solution due to the permanent use.
Optimization of working capital: base financing as relief
A base financing, which cushions permanently over the current account credit used funds (forms a base), is here a possible relief. But hardly any companies optimize their own working capital through base financing. Why is that so?
The background is often too short-term planning in the business in terms of running costs. The overdraft facility is not seen as a short-term solution, but is used as a regular instrument (even on a permanent basis). The costs are accepted without taking into account that a base financing can possibly save high costs. In addition, many entrepreneurs are afraid to take an additional corporate loan such as a working capital loan. The overdraft, on the other hand, is not understood as a classic financing – even though it is, of course, nothing else, only at higher interest rates.
In any case, it is advisable to obtain information in connection with a possible base financing, even apart from the house bank. As the COMPEON study mittelstandsfinanzierung 2019 shows, still only about 48 percent of medium-sized companies use only one bank account. If you include more financial providers in a comparison, you get a comprehensive overview and can select the most favorable option.
Quickly explained with an example: how exactly does pedestal financing work?
To illustrate how savings potential can be leveraged with base financing, let's use an example:
Company A regularly uses the overdraft to purchase raw materials and supplies, to pay parts of staff salaries at the end of the month, or to make unforeseen repairs or maintenance. The current account limit is 500.000 euros. The company is doing well and the overdraft is not overused, but still used to some extent permanently. But since the interest rate on the current account is quite low compared to other companies at 5.8 percent, no one worries and accepts the cost.
The charge on the overdraft was never less than 125.000 euros. As an example, let's just calculate the costs that this long-term use generates.