Cash facility: definition

There are several types of cash credit:

  • specialized short-term loans to finance a specific need for a fixed period;
  • the bank overdraft which corresponds to an account debit authorization aimed at covering longer cash lags over the year;
  • the overdraft facility, which makes it possible to exceptionally settle payments when there is not the required reserve in a bank account.

This facility makes it possible, for example, to bridge the gap between the revenues expected by a company and the expenses that it must immediately cover: payment of suppliers, salaries, etc. Given its brevity, this facility cannot be considered as a means of permanent financing of working capital (cash flow requirement generated by a gap between stocks and payment terms). Its terms of use are established by contract and may be revised at any time.

Similar to a debit authorization, the overdraft facility is generally granted up to a few days per month (+ or – 15 days) in order to regulate the alternation of debit and credit peaks. At the end of this period the bank account must become credit again.

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Amount of the overdraft facility

The amount of this facility depends on the client’s turnover, activity and financial structure. In return for the flexibility granted, the bank receives a higher interest than that of an authorized overdraft (approximately 7% in November 2020). This rate can be fixed or variable.

Interest is calculated based on the number of days the account was in debit and the amount drawn. For the company, the book balance can be verified online, by value date. In the event of an overrun, the interest rate applied beyond the authorization is generally increased. The level of these agios must not exceed the legal threshold of usury.

Request for overdraft facility

Nothing obliges a bank to grant an overdraft facility to a customer, most often a business, to whom this one-off credit avoids the inconvenience associated with payment incidents (fees, etc.). It is up to the customer to request an overdraft facility, with the bank free to accept or decline it. It is recommended to send a letter with acknowledgment of receipt to justify this request and ensure its traceability. Before giving the green light, the banker reviews the financial situation of the company (balance sheet, income statement, etc.) by checking what justifies a cash flow marked by peaks in the operating cycle.

The overdraft facility is generally set up for a period of one year. It is reassessed at the end of each financial year. The bank can cancel it at any time with 60 days notice. This period applies both for the total termination of bank loans or for a simple reduction in the loans granted by the bank.

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Ease of checkout: advantages and disadvantages

This option is intended to help a company to cope with the payment of employees, social security contributions or even VAT, the deadlines of which are fixed. Even if it does not finance investments or expenses foreign to the activity of the company, its main advantage is to provide a financial oxygen bubble and to avoid the inconvenience associated with an unauthorized overdraft. The company can thus overcome a cash flow problem without having to justify the financing need to which the facility responds from time to time.

The overdraft facility therefore provides flexibility in cash management and the ability to honor invoices on time, even if the company’s cash flow is in the red.

Symmetrically, the drawbacks of the overdraft facility are its cost, its brevity (more or less 15 days per month). And the fact that it can be deleted at any time by a bank without the latter being liable for excessive credit termination. Neither held responsible for financial losses suffered by other creditors (article L313-12 of the Monetary and Financial Code).

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