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Written byShaun McGowan
A business overdraft isn’t ideal for every business. However, if your business has a high turnover and needs fast access to funds on an irregular basis, an overdraft may be more suitable than other forms of business finance, such as a line of credit.
A business overdraft is an extension of credit by a lender that allows a business to access funds greater than the amount available in its business trading account. It is often linked directly to your business account, allowing business owners immediate access to available overdraft funds. You can choose to apply with a bank or non-bank lenders.
A business overdraft is a popular form of business finance used in almost every industry, for managing working capital, purchasing inventory, funding new developments, and much more.
You can choose to apply with no security — called an Unsecured Business Overdraft — or provide security backed by property.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
Below we'll look at two examples of how a business overdraft might be used.
Amount accruing interest
Remaining overdraft credit
Annual business turnover
Less than $5m
More than $5m
Weekly or Monthly
Terms on a business overdraft range from 3 months to 5 years. However, even if you agree to a 5-year term with a lender, they may be able to review the overdraft facility at any time.
|Minimum term||Maximum term|
Each lender will have their own fees and interest rates, however it’s common that you will be required to pay a facility fee — an annual fee to keep the overdraft amount available.
Interest on a business overdraft will only be calculated on the amount withdrawn and each time you withdraw an amount.
|Overdraft amount||Annual facility fee|
Lenders also have their own repayment requirements. For example, a traditional bank overdraft may only require you to pay back the interest on any amount withdrawn, while some specialist lenders may set a minimum principal repayment amount.
Be sure to research each lender’s repayment criteria before agreeing to an overdraft.
|Lowest rate||Highest rate|
To qualify for a business overdraft, lenders will need to conduct a credit assessment. While the most important consideration for any loan is your ability to repay the borrowed amount, you can only apply if:
You can apply for a business overdraft with some banks, though many borrowers will seek out non-bank lenders and specialist lenders, often 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 online through a quick and 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.
Loan Amount: --
Establishment Fee: --
Total Interest Paid: --
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|YEAR||REMAINING BALANCE||MONTHLY REPAYMENT||INTEREST PAID||ENDING BALANCE|
Yes. Provided you can demonstrate an ability to meet repayments on the new amount through increased business turnover, your lender should allow you to increase your overdraft limit.
Interest rates on a business overdraft in Australia can vary between 14.95% and 24.93%. The average interest rate for a secured overdraft will be between 14.95% and 18.95% and for an unsecured business overdraft between 18.95% and 24.93%.
Yes, you can apply without providing a deposit or any collateral as security — this is referred to as an unsecured business overdraft. However, you will get the lowest interest rates if you apply for a secured business overdraft, as a securitised overdraft presents less risk to the lender.
Once you are approved for your business overdraft, you will be free to access the funds as and when they are required.
You'll still need to pay an annual facility fee for the access to your overdraft, and remember that any amount used will incur interest charges until it is repaid.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.