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What is a business overdraft?
A business overdraft allows a business to borrow money by accessing funds greater than the amount available in a business trading account. Interest is only charged on the amount overdrawn.
A business overdraft is linked directly to your business account, giving business owners immediate access to funds.
This is what makes it different to a business line of credit, which is a similar credit facility but is not linked to a bank account.
A business overdraft is a popular form of business finance used in almost every industry, for managing working capital, purchasing inventory, and much more.
What you get with a business overdraft
- Borrow from $2,000 to $1 million
- Interest rates between 7.5% p.a. - 25.00% p.a.
- Interest only charged on amount withdrawn
- Access funds any time via a business bank account
- Can be secured or unsecured
- Applications assessed according to business turnover
- Usually quicker than applying for a loan
- Offered by banks and non-bank lenders
7 steps to getting a low-cost business overdraft
1. Compare options beyond your existing bank
If you decide to get a business overdraft set up, applying with the bank you already have a transaction account with might seem like the most obvious first step. But you should compare multiple options first.
Like any kind of business finance, the interest rates, fees and other terms on business overdrafts can vary a lot depending which provider you go with.
2. Look for the lowest fees possible
With a business overdraft, expect to pay an application fee as well as a line fee, which will likely be quarterly or annually. The lender charges a line fee for keeping the overdraft facility open and it applies whether you use the overdraft or not. Line fees are either a flat amount or can be a percentage of the credit limit.
There can also be hefty fees if you draw down funds beyond your overdraft limit.
In our experience, not all lenders advertise the actual fees they charge. Instead, fees are "determined upon application" or something similarly vague. This is where we come in. We'll help you understand the business overdraft fees charged by multiple lenders, without you needing to apply first.
3. Business overdraft interest rate
Data from Money.com.au lenders shown business overdraft interest rates can range from around 7.5% to 25% p.a.
That's quite a difference from highest to lowest. Particularly if you will have funds overdrawn on a regular basis, it’s important to look for the lowest interest rate possible (even though you’ll only be charged interest on funds withdrawn).
Your interest rate will be tailored to your business depending on factors like annual turnover and how long it’s been operating. Your personal credit rating may also be a factor.
According to the RBA, the average overdraft interest rate for a small business is 10.26% p.a.
4. Consider whether a secured or unsecured overdraft is best
You generally have the choice of a secured or unsecured business overdraft. A secured overdraft will be backed by an asset you or your business owns (usually residential or commercial property).
Interest rates and fees are usually lower on secured overdrafts. But if you need a quick approval, an unsecured overdraft is usually more straightforward to apply for.
5. Pick a suitable overdraft term
Terms on a business overdraft range from 3 months to 5 years, or some involve a ‘revolving’ line of credit with no set term. Even if you agree to a set term with a lender, they may be able to review the overdraft facility at any time.
Importantly, if you only need help with cash flow for a short period of time or one-off project, avoid signing up for an overdraft with a long or open-ended term. You'll likely be charged overdraft fees long after the overdraft has served its purpose.
6. Pay attention to the repayment requirements
A traditional bank overdraft typically won't have set repayment requirements. You essentially repay it as and when funds are deposited into your account. This is obviously a very flexible option. It can also be very expensive as interest charges are added.
Some of the smaller specialist lenders we work with set a minimum principal repayment amount on business overdraft facilities. This means there will be a limit on how much interest you will pay over time on the amount overdrawn.
7. Choose your overdraft limit carefully
There are two ways you could arrive at a suitable overdraft limit for your business:
- What the lender is willing to offer you as a maximum credit facility; and
- The amount you actually need.
Some fees are charged as a percentage of your limit. In other cases, there are fee bands. A higher overdraft limit could move you into a higher fee band. Either way, a higher overdraft limit than your business needs will cost you more.
Who does a business overdraft work best for?
If your business has a high turnover and needs fast access to funds on an irregular basis, an overdraft may be suitable as it offers quick and reliable access to funds.
In our experience working with Australian businesses, industries commonly using a business overdraft include retail, wholesale, manufacturing, professional services, food and beverage, technology and automotive.
A business overdraft is generally not as well suited to long-term capital investment, like purchasing an asset. In that scenario, equipment finance, a business car loan or chattel mortgage may be a better fit.
We find that businesses using a business overdraft need cash flow really fast.
That could be for paying invoices, paying staff, doing fit outs or just having some extra working capital.
With an overdraft, the funds are sitting there ready to go whenever you need them. At the click of a button, the funds are transferred straight to you.
Some businesses look at an overdraft as a bigger credit card or charge card but without the big fees. For example, some of our lenders don't have monthly account keeping fees. You only pay interest on what you borrow. If you pay it off early, there's generally no early payment fees.
How to use a business overdraft: case study
Let’s look at an example of how a business overdraft might be used.
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A business is approved for an overdraft of $50,000
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The business withdraws $20,000
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The amount accruing interest is $20,000
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The remaining overdraft amount is $30,000
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The business then deposits $10,000 into the overdraft account
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The amount being charged interest is now $10,000 and the available limits $40,000
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The business is charged an annual fee for use of the overdraft (applies regardless of how much is withdrawn)
Am I eligible for a business overdraft?
To qualify for a business overdraft, you’ll need to pass the lender’s credit assessment criteria:
- You are a sole trader, partnership, trust or company with a valid ABN
- You are an Australian citizen or permanent resident with a residential address in Australia; and
- Your business is registered for GST and has been operating for at least 12 months; and
- You have a good credit history; and
- You intend to use the overdraft for business purposes, and
- Your business turnover level is high enough to service the overdraft repayments
How to apply for a business overdraft
You can apply for a business overdraft with most financial institutions that offer business banking. However, many borrowers prefer non-bank and specialist lenders due to the fast approval time and access to funds offered by these companies.
Most specialist non-bank lenders will also allow you to apply for a business overdraft online through a simple form.
If you are looking to borrow up to $150,000, some specialist lenders will only require business bank statements to grant approval. You could apply online and have the funds available the next day.
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