Discuss the advantages and disadvantages for a new business of using an overdraft as a way of managing its cash flow.

With high initial setup costs and a lack of a steady revenue stream, it is a common situation for a new business to encounter cash flow problems while waiting for funds from its debtors to arrive. An overdraft is a short-term finance source which can be used in this situation. The main advantage of an overdraft is that contrary to a loan, it can be arranged quickly. It is also easier to obtain for a new business, without a credit history or past profit and loss statements. Furthermore, it does not require collateral to be secured. This is crucial when the business needs to pay employee salaries or cover supplier bills, and avoid late payment chargers and potential legal issues associated with delayed payment. An overdraft is free when not used, as no interest needs to be paid until overdrawn. This makes it a perfect backup for emergencies and cash flow problems. These benefits come at a cost though. Overdrafts often have higher interest rates when compared to loans. Furthermore, the availability of an overdraft facility discourages the business from reducing bad debts. It also disincentives them from negotiating longer payment periods with suppliers and considering other potential options to improve cash flow. Finally, overdraft facilities are in the full control of the issuing bank. Therefore, they can be recalled or cancelled without substantial warning, leaving the business in a situation where they cannot cover their debts. In summary, overdrafts are a good short-term source of finance, due to their flexibility and availability. However, they should not be used as a long-term source of finance, and should only be reserved for emergencies, due to the high interest costs and potential of being cancelled by the bank.