Living on Overdraft

For far too long, businessmen, large and small, have used credit cards  to finance some day to day company operations. When one crunches the numbers, it is very clear that practice isn't very smart. Were businesses to pause for a moment and consider the cost of interest that credit cards generate, they might have put some brakes on their very extensive use. Most companies are much more focused on generating sales and serving clients and customers.

Now, credit of any sort is very tight. Not a few small and medium sized companies are experiencing some very inconvenient cash short falls. Businesses are forced to scale back spending  and that has certainly affected operational and marketing planning.

When a company finds itself in a cash crunch, there is an almost compelling temptation to shift using overdraft in the same way it used to use credit cards.  It is not a stretch to see a company using overdraft as a strategy of last resort to keep the company afloat. However one slices or dices this strategy, it still means that the company is spending money it does not have. By any other name, the bank is loaning the company to cover cash card purchases.

The worst aspect of the concept of overdraft as a service is that it is not regulated by any state or federal agency. In fact, if one were to ask a bank representative if money advanced for an overdraft transaction is a loan, that representative would say no. Banks cannot admit that overdraft money advances are loans, for if they did, they would be regulated. The bank would say it is a convenience extended to its customers.

The truth is that banks introduced overdraft banking in a calculated effort to reap millions of dollars in additional income. Pardon the pun, but they were "banking" on most companies managing their bank accounts poorly and that most cash card purchases were not booked in a timely manner. Frontline, in the episode titled The Card Game, reported that to add insult to injury, banks added software that would rank cash card transactions by how a large a purchase the customers made. At the end of the day, the computers were set to process the largest purchases first. The internal logic of this programming was to push the client's account into overdraft and when that occurred, every small transaction that remained would generate another juicy overdraft fee. So much for banks looking after the best interests of their clients.

As the owner of a business, ask whoever does your bookkeeping to track just how much your company spent on overdraft fees over the last six months. If yours was a company that actually used overdraft as a financing option, you will probably be very dismayed to find out how much it has cost you over the long term. That realization will be the real measure of how poor a strategy it is to allow your company to live on overdraft in this or any business environment.

Howard Fireman
Productivity Consultant/ Accounting
howard.fireman46@gmail.com