Businesses often use overdraft accounts to access extra cash for a variety of reasons. A business overdraft is designed to fill in the cash flow gaps when you need it most, so your business can run smoothly.
What is a business overdraft?
A business overdraft is a revolving line of credit designed to help businesses when they need access to funds. For example, you may be waiting on payment from clients for completed projects, but you still need to pay the bills and other ongoing business expenses.
A business overdraft offers security and confidence by making sure you have the cash to pay suppliers and employees. It can also be used to expand your business or let you negotiate better terms on purchases by enabling you to afford larger upfront purchases.
How does a business overdraft work?
A business overdraft is typically linked to the business transaction account you hold with your financial provider. It is a revolving line of credit that offers fast access to additional funds in your account when you need them.
Business overdrafts are available in secured or unsecured form and with fixed or variable interest rates. Unsecured business overdrafts generally have higher interest rates due to the level of risk.
There is typically no minimum or maximum term. You can tailor a flexible repayment schedule to fit your budget.
Where can I get a business overdraft?
Any financial institution that offers a business transaction account typically offers a business overdraft, but you will need to apply. In Australia, you can get business overdrafts at major banks such as Commonwealth Bank, ANZ, Westpac and NAB. Interest rates, fees and eligibility vary between them.
For example, an unsecured business overdraft at ANZ can provide unsecured overdrafts of up to $100,000 with an interest rate of 14.95% p.a. This overdraft also includes tiered annual fees depending on your overdraft size, starting from $250. Plus, the business transaction account has an annual fee.
What are the types of business overdrafts?
Secured loan. A secured loan requires you to offer an asset as security for the loan. This reduces the risk a lender faces by allowing you to access funds. By offering something as security, you can access lower interest rates and fees.
Unsecured loan. An unsecured loan does not require you to offer anything as security. As a result, you can expect higher interest rates and fees than on a secured loan.
How do I compare business overdrafts?
Secured or unsecured. Decide whether you want to offer an asset as security to take advantage of lower rates.
Interest rates. The lower the interest rate, the less you'll have to pay in interest charges on the amount you spend. You can also choose between the security of a fixed rate and the savings possibilities of a variable rate.
Fees. Look at the fees and charges attached to every competing business overdraft. These include application fees, annual fees and other ongoing fees.
Repayment options. For example, do you need to stick to a rigid repayment plan or is there any flexibility built in? Look for an overdraft that lets you tailor repayments to suit your budget.
Loan term. Some business overdrafts don't feature any minimum or maximum loan term at all while others require you to pay the loan off over at least 12 months.
Finder survey: How many Australians have an ABN?
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68.47%
Yes
31.53%
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
What are the pros and cons?
Pros
Extra security. A business overdraft gives you peace of mind knowing you can access funds when you need them.
Flexible repayments. Pay off the amount you can, whenever you can with no fixed repayment schedule as long as you stay under an agreed limit on your account.
Many uses. You can use the funds in your overdraft account for different purposes, ranging from paying suppliers to expanding your business.
Cons
Higher fees. Overdrafts tend to carry higher interest rates and fees than many other loans.
It's still debt. Make sure you use the overdraft for expenses that you know you'll be able to pay back.
It's easy to ignore. Because it's not as formal as a loan with regular repayments, it can blend into your business transaction account. You may have it hanging over your head for a longer time.
How do I get approved for a business overdraft?
Like with any application for credit, you need to prove that you are not a high-risk borrower. You're more likely to be approved for a business overdraft if you have not been overdrawn or had an account in arrears in the last 3 months, you have not been declared bankrupt in the last 5 years and you have not had any accounts in collections in the last 6 months.
You also need to prove that the overdraft is for business purposes. You need to prove your eligibility as a business owner, must be 18 years of age and must meet other eligibility requirements to open the original business transaction account.
What finance options can I consider if I have a bank overdraft?
If you have a business overdraft already, it may affect your chances of additional funding. This depends on your specific situation though, such as your credit history or whether or not your overdraft is secured.
Other common financing facilities include lines of credit, charge cards and term loans. A host of non-bank lenders also offer non-traditional facilities such as invoice financing. In the end, the right decision should be based on your own situation, so consider your options carefully.
Line of credit
Here, your lender approves your credit up to a maximum limit. Repayments are made based only on the amount you withdraw and interest is charged on this amount. You'll also likely pay an annual fee.
Charge cards
Business charge cards can help you manage day-to-day expenses by allowing you to charge transactions to a card. However, the amount borrowed must be paid in full by the end of the month. Although no interest is charged, you are required to pay an annual fee.
Term loans
These are secured or unsecured lump-sum loans, with the full amount disbursed upfront. You'll make fixed monthly repayments according to a predetermined schedule for the loan to be paid in full, with interest, by the end of the term (anywhere between 1 and 7 years).
Invoice financing
This is an unsecured facility where you can get up to 85% of your invoices paid upfront from a factoring company, rather than waiting for the full 30 to 60 days to receive payment from customers. Invoice factoring, which involves the financier collecting the invoice payments directly, is also an option.
Frequently asked questions
Do I need to offer an asset as security? Not necessarily. Business overdrafts are available in secured and unsecured form.
What is the purpose of a business overdraft? Overdrafts are designed to help you manage business cash flow, offering quick access to funds when you need them.
What can I use the funds for? This is up to you. You can use the funds to pay urgent expenses, expand your business or even negotiate better deals with suppliers.
Jeremy Cabral is the chief operating officer and global head of publishing for Finder. He has written hundreds of comparisons covering everything from credit cards to travel money to Netflix TV shows. Jeremy has a Bachelor of Business (Marketing) from the University of Western Sydney. See full bio
Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio
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Is it necessary to own a business to set up an overdraft with my bank?
Hi Chris,
To apply for a business overdraft account, you will need to provide your ABN and other business documentation.
Please read our personal overdraft guide to learn more.
Hope this helps.
Cheers
Matt