Business Overdraft
Business Overdraft
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What is a business overdraft and how do they work?
An overdraft is a facility attached to your business transaction account that allows you to withdraw funds beyond a $0 balance at any time. This means you’ll be approved for borrowing up to a set limit and can access these funds whenever you like.
For example, if your business had an overdraft limit of $20,000, you could withdraw up to $20,000 at any one time, provided your outstanding debt doesn’t exceed that limit. You could access smaller amounts of $1,000 to $2,000 at any time without needing to seek out formal approval.
Once you’ve borrowed your money, the next step is chipping away at your balance. Unlike most loans, though, overdrafts often don’t have any formal repayment requirements (or very small minimum payments), meaning you can pay them at your own speed.
The important thing to note with repayments is that overdrafts generally have higher interest and fees than standard commercial loans, meaning it may end up being much more expensive overall if you only pay the minimum.
Will my overdraft be secured or unsecured?
You’ll be able to choose whether to secure your overdraft or leave it unsecured. This means you’ll either attach a commercial asset owned by your business as collateral (secured) or leave it without any collateral (unsecured).
Secured overdrafts, like secured business loans, come with lower interest rates and fees than unsecured options, but generally take longer to process. This is because your bank will need to assess whether the asset meets its collateral requirements. They can also increase your maximum limit in some cases.
When it comes to unsecured overdrafts, these are suitable for businesses that don’t own major assets that meet their bank’s collateral requirements (such as being too old or not valuable enough) and want to arrange them quickly and easily. You can speak with a friendly Savvy consultant about the options on offer to your business when you apply with us.
How do I compare business overdraft facilities?
There are plenty of factors to consider when comparing your business account and overdraft options. Here are some of the main ones to think about:
- Minimum and maximum withdrawal limits: it’s crucial to make sure your business can access the amount you need. That’s why you should keep an eye on the smallest and largest available overdrafts.
- Interest rate: of course, the lower your rate, the less you’ll have to pay overall.
- Fees: the same applies to fees, with different lenders charging different costs like establishment (one-off) and line fees (percentage of total limit).
- Secured or unsecured: make sure the overdraft you’re applying for is offered with your choice of secured or unsecured.
- Eligibility criteria: every business will need to meet a set of requirements to be approved for an overdraft facility, so check these before you apply.
- Security requirements: if you’re applying for a secured overdraft, you’ll also need to ensure your asset meets your bank’s criteria.
When you apply with Savvy, all the comparing is done for you. Your consultant will consider options from our panel of trusted providers to find the best one to suit your business.
How are overdrafts different from line of credit loans?
Overdrafts and line of credit loans are very similar in how they function: both approve you up to a set limit, allow you to withdraw funds when you need them and allow you to pay them off at your pace. The only major difference between them is what they are (or aren’t) attached to.
A line of credit loan you receive from a lender will be just that: a loan. These facilities aren’t attached to any business bank accounts. This means that, while they are still one of the most flexible types of finance, they won’t be directly connected to a bank or credit card.
If you’re unsure which option is best for you, you can speak with a member of our team for more information about how these products work and what we might be able to help you with.
The benefits of business overdraft facilities
Applying for a business loan
Tips for minimising your business overdraft costs
Common overdraft questions answered
Can I claim my overdraft interest as a tax deduction?
Yes – as long as 100% of the funds are being used for business purposes, you can claim up to 100% of the interest on your outstanding balance as a tax deduction. If you aren’t sure what you can or can’t claim, you should always consult your accountant or a tax professional.
Can I be approved for a business overdraft with bad credit?
There are lenders in Australia that specialise in working with businesses who’ve struggled with their credit in the past. That means that even if your business’ score isn’t the best, you may still be able to get the overdraft you’re after (provided you meet your lender’s criteria).
Will I still have to pay fees if I’m not using my overdraft?
Yes – you’ll be charged a line fee in most cases, which is a fee charged as a percentage of your maximum limit. This will be charged on an ongoing basis regardless of whether you use any overdraft funds. That’s why it’s especially important to keep this in mind when comparing your options, as it isn’t just interest you’ll have to have your eye on.
How will my bank work out the interest rate on my business’ overdraft?
Your overdraft rate will be determined by a range of factors, including your business’:
- Credit and repayment history
- Revenue
- Assets and liabilities
- Size
- Time in operation
Will I pay interest up to my full overdraft limit?
No – interest will only be charged on the outstanding balance, not the full amount you’re approved for. As an example, if you had a $50,000 overdraft limit and withdrew $10,000, you’d only pay interest on the $10,000, not $50,000.
Is there a maximum number of withdrawals I can make?
No – you won’t be restricted by the number of withdrawals on your overdraft. The only restriction you’ll need to worry about is the maximum limit set by your bank or lender.
Should I just take out a business loan instead?
Whether you should apply for a business loan or an overdraft depends on your preferences as a business owner. If flexibility and access to funds whenever you like is your #1 priority, overdraft is likely to be the option you land on.
However, you’re likely to have more options in the market when it comes to business loans (whether secured or unsecured). They also may be more suitable if you need to borrow a large sum beyond your overdraft limit.
Which businesses are best suited to an overdraft?
Although any number of businesses may look for an overdraft, in most cases, those that need easily accessible funds on an ongoing basis are often the ones on the hunt for this facility. For example, it’s more likely to come in handy for paying your staff or invoices than it is for purchasing assets.
