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 expenses.
A business overdraft ensures you have funds to pay suppliers and employees. It can also be used to expand your business or afford larger upfront purchases.
A business overdraft is typically linked to the business transaction account you hold with your bank. It's a revolving line of credit that offers fast access to additional money in your account when you need it.
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. The bank you're with will determine how large your overdraft can be when you apply.
There is typically no minimum or maximum term. You can tailor a flexible repayment schedule to fit your budget.
Any financial institution that offers a business transaction account typically offers a business overdraft, but you will need to apply and be approved.
Interest rates, fees and eligibility vary between them.
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Secured or unsecured. Decide whether you want to offer an asset as security to take advantage of lower rates. Check with the bank what they will accept as a security.
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. You will usually have to apply for the overdraft in order to get the rate - these aren't usually advertised.
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 cashflow.
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.
Overdraft amount. Some overdrafts will allow more access to funds than others. If you only need a bit of extra cash, you can choose one with a smaller limit.
Depending on the bank, you might be required to apply over the phone or in a branch. Some banks will allow you to apply for a smaller overdraft online, particularly if it's unsecured, but these might come with higher rates.
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 all eligibility requirements to open the original business transaction account.
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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