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What is a business overdraft?
11 Mar 2016
CANSTAR explains how a business overdraft works, fees and charges that may apply, and the interest rate typically charged on business overdrafts.
A business overdraft is a line of credit that becomes available when you make any withdrawal for an amount greater than the balance in your business debit account.
This means you can continue making withdrawals even if the account is empty, giving you flexibility in your cash flow. It can enable you to pay your employees on time no matter whether or not your clients have paid you on time, and it can be helpful for businesses with a large number of seasonal workers.
What you spend must be repaid, of course, just like a credit card or a business loan. Interest is charged on the overdraft based on the amount of credit you used.
An overdraft comes with an overdraft limit, which operates like the credit limit on a credit card. At the time of writing, comparing business overdrafts on our database shows that financial institutions are offering a maximum credit limit of $500,000 up to a staggering $100 million. Of course, you would not want your business to be paying interest on a debt of $100 million!
Some business overdrafts for certain purposes (e.g. agribusiness) also have a minimum loan amount that is borrowed when the overdraft is activated. At the time of writing, the vast majority of overdrafts have a $0 minimum loan amount, but a significant number of providers have minimum loan amounts of anything from $1,000 up to $250,000.
This line of credit can be secured or unsecured. A business overdraft can use business assets or property (commercial, residential, or rural) as security. If your overdraft is a secured line of credit, your financial institution will be able to sell the asset you used as security if you do not repay your credit in time.
what-fees-and-charges-apply?">What Fees and Charges Apply?
Application fee: At the time of writing, our database shows that we do not currently research any institutions that charge an application fee. Business owners should therefore be very wary of any institution that does charge an application fee.
Account-keeping fees: Ongoing fees charged to continue to manage the overdraft facility.
Establishment fee: An upfront fee charged to set up the overdraft facility. In practice this is often negotiated between business owners and financial institutions based on the nature of the overdraft.
Interest rate: Interest is charged on the amount of overdraft credit spent. At the time of writing, our database lists interest rates of between 5.19% and 12.15%.
Minimum repayments: Only 6 of the institutions we research at the time of writing charge fixed or minimum mandatory repayments on the business overdraft facility.
Overdraft or over-limit fee: A penalty fee charged if you exceed your overdraft credit limit.
