What Is A Business Overdraft?
An overdraft is a feature of many transaction bank accounts which allows you to continue to draw funds from the account even if the account has a zero balance. Often an overdraft will have a pre-determined limit which dictates how much you are able to continue to draw from the account after its balance hits zero.
An overdraft acts much like a line of credit in that interest is charged on any amount that is drawn of the overdraft amount and it can be repaid back and drawn down at any time. The key difference is that it is often linked to a transactional bank account. If the account balance is below zero and the overdraft is being used, the account is said to be ‘overdrawn’. Overdrafts limits can start at anywhere from $2,000 to $5,000 and if secured with collateral, can go up to over $100,000 with the maximum limit subject to lender approval.
Pros And Cons Of A Business Overdraft
Pros ✓ Improve Cashflow ✓ Provides A Safety Net ✓ Limited Interest ✓ Flexibility
Cons X Higher Interest X Security X Penalties
Benefits Of An Overdraft
Like a line of credit, an overdraft is an open line of funds that can be drawn and paid back at any time. This is great because with a business overdraft you can have the peace of mind that whenever you need new funds, whether it be for unexpected costs or brand-new opportunities, they are available and ready to go. No more going back to the bank to take out a new loan every time!
✓ A Business Overdraft Can Improve Your Cashflow If you operate a seasonal business that experiences ebbs and flows in your cashflow, arranging an overdraft facility could be a wise decision. It can also be a good way to cover unexpected costs and help to ensure that your business continues to run smoothly.
✓ It Can Provide You With A Safety Net Unexpected costs will likely occur, so it is better to be prepared. By setting up an overdraft facility you are helping to ensure that you have enough funds available, and even if you accidentally get overdrawn, you aren’t hit with overcharges that some banks charge.
✓ You Only Pay Interest On What You Borrow A business overdraft can be a good way to ensure your business has the funds available it may need, without paying unnecessary interest. With a business overdraft, you are only paying interest on the amount that you have overdrawn.
✓ Business Overdrafts Are Flexible Business overdrafts can be applied for at any time, they can be unsecured or secured, and range between $2,000 and $100,000. You may choose to close the facility at any time, and you can make payments as you see fit.
Drawbacks Of An Overdraft
Whilst business overdrafts can provide great flexibility to your business, lender’s will often require a couple of years of trading before they will approve an overdraft.
There is also the chance that the overdraft may have a ‘repayable on demand’. This means that the lender can demand that you pay back any overdrawn amounts at their will. This can really pull the rug out from under you so it’s a good idea to be fully aware of all the terms and conditions of your overdraft!
One thing to watch out for are the different fees involved with an overdraft. These often include an upfront application fee as well as annual ‘maintenance’ fees. Many lenders provide overdrafts that don’t charge any upfront fees so it pays to shop around and explore your options.
X Can Have Higher Interest Rates Than Other Facilities Business overdrafts are best used for small short-term financing. This is because the interest rate can be higher than other forms of financing. If you need a larger scale loan over a longer term, another facility might suit you better.
X You May Need Security Not all business overdrafts are unsecured. Depending on your specific situation, an overdraft facility may need to be secured against an asset.
X Lenders May Enforce Penalties Different facilities will have different costs, including interest rates, fees and charges. Some lenders will charge penalty fees if you go over your limit, so it’s important to understand how much you could be charged and determine how large your overdraft needs to be.
What Is The Best Way To Use A Business Overdraft?
Overdrafts are best kept as reserve funds to help smooth out the ups and downs of cash flow over time. Whether the funds are used to pay for unexpected expenses or fund a new growth opportunity, that is entirely up to you. The only thing would be to be careful of where your limit is and to only use the overdraft when you are comfortable that you will be able to pay back the amount you draw down in the future, so you aren’t stung with large interest bills.
Credit Card Versus Business Overdraft
While business overdrafts and credit cards are both revolving lines of credit, they are still unique. An overdraft will only let you access funds when your account balance reaches zero, whereas a credit card can be used at any time. If you are in need of funds consistently, and need a quicker approval process, a business credit card may be the better option.
If you are unsure which will offer you the better terms and rates, use our loan wizard or speak to one of our lending specialists on 1300 780 568.
Applying For A Business Overdraft
Applying for an overdraft is similar to applying for most other loans in that you likely have to provide business bank statements in addition to business financial statements.
When applying for an overdraft be sure to ask for any application fees (if there are any) as well as if there are any other ‘facility fees’. This could include an ongoing fee charged by the lender for having the fund ‘in reserve’ for you in the form of the overdraft. Be sure to always ask for a thorough explanation of all of the terms and conditions included in your overdraft agreement too.
To qualify it is best if you show:
- Good cashflow
- Existing property
- Good credit
- A legitimate need
To compare your overdraft lender options, interest rates, and potential terms, use our free online loan wizard. Alternatively, you can speak to one of our lending specialists in a no-obligation call by calling 1300 780 568.
Business Overdraft Interest Rates
The interest rate on a business overdraft is typically higher than a traditional business loan. The interest rate is usually variable but is impacted by your specific situation.
The interest rate you can expect to pay will be impacted by your cashflow, whether you have assets to put down as security, the lender, and the specific terms of your facility.
Business overdraft interest rates are typically between 6% and 17% per annum.