What is a Business Overdraft?
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. A business overdraft is often linked directly to your business account, allowing business owners immediate access to available overdraft funds. You can choose a business overdraft from a bank or non-bank lenders.
You can choose to get a business overdraft with no security - called an Unsecured Business Overdraft - or provide security backed by property.
In this Business Overdraft guide, you’ll learn:
- How a business overdraft works
- How to apply for a business overdraft in Australia
- What you will need to apply
- How much you can borrow with a business overdraft
- How to compare interest rates, terms and fees
How does a business overdraft work?
A business overdraft works in a similar way to a Business Line of Credit. A lender will agree to make an amount of credit available to your business, which you can then access whenever you need to. A business overdraft will be linked to your business banking account, and you will pay back any amount withdrawn - plus interest - through scheduled payments.
Depending on the annual turnover of your business, you may be given the option to choose between weekly or monthly repayments. Interest will only accrue on the amount you withdraw from your overdraft.
In the table below, you’ll see how a business overdraft works.
How a Business Overdraft works
|Overdraft Limit||Amount Withdrawn||Amount accruing Interest||Remaining Overdraft Credit||Annual Business Turnover||Repayment Frequency|
|$500,000||$400,000||$400,000||$100,000||Less than $5m||Weekly|
|$500,000||$25,000||$25,000||$475,000||More than $5m||Weekly or Monthly|
In the first example:
- A business is approved for an overdraft of $500,000
- The business withdraws $400,000
- The amount accruing interest is $400,000
- The remaining overdraft amount is $100,000
- The business has an annual turnover less than $5m
- The business will make weekly repayments
In the second example:
- A business is approved for an overdraft of $500,000
- The business withdraws $25,000
- The amount accruing interest is $25,000
- The remaining overdraft amount is $475,000
- The business has an annual turnover more than $5m
- The business can choose between weekly or monthly repayments
Once you are approved for a business overdraft, you should be able to access and withdraw funds within 24 hours.
How to apply for a business overdraft
You can apply for a business overdraft with some banks, though many borrowers will seek out non-bank lenders and business overdraft 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.
A business overdraft will be linked to your business transaction account. This means that even if you apply for an overdraft with a specialist lender, you’ll be able to access the funds online as you would through your bank.
Who can get a business overdraft?
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 for a business overdraft in Australia if:
- You have a valid Australian Business Number (ABN); and
- You are an Australian citizen or permanent resident; and
- You have a residential address in Australia; and
- Your business is registered for GST; and
- Has an annual turnover of at least $250,000; and
- Has been operating for at least three years; and
- You have a good credit history; and
- You intend to use the overdraft entirely or predominantly for business purposes.
A business overdraft is a popular form of business finance used in almost every industry, either for managing working capital, purchasing inventory, funding new developments, and more. In Australia, industries commonly using a business overdraft include:
- Professional services
- Food and beverage
What if I don’t qualify for a business overdraft?
If you don’t qualify for a business overdraft but still need access to business finance, you could consider other options that may be more suitable. For example, you could use a chattel mortgage to finance company vehicles, or an operating lease if you don’t intend on owning the asset at the end of the term.
To learn more about the different kinds of business finance currently available in Australia, you can read our Business Loans Guide and see which type of business finance is most suitable for you.
What are the terms on a business overdraft?
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.
Business Overdraft Minimum and Maximum Terms
|Product||Minimum Term||Maximum Term|
|Business Overdraft||3 Months||5 Years|
What are the fees and interest rates on a business overdraft?
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.
Business Overdraft Fees
|Product||Overdraft Amount||Annual Facility Fee|
Each lender will 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.
Business Overdraft Interest Rates
|Product||Minimum Interest Rate||Maximum Interest Rate|
Providing security over residential or business property will lower the interest rate applied to your business overdraft.
Business Overdraft Summary
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 finance, such as a Line of Credit.
In summary, business overdrafts in Australia:
- Range from $25,000 to $500,000
- Have interest rates between 14.95% pa - 24.93% pa (APR)
- Allow access to secure funds at any time
- Only accrue interest on the amount withdrawn
- Are assessed according to business turnover
- Can be approved very fast by non-bank lenders
- Usually involve an easy application process
Business Overdraft Pros and Cons
Business Overdraft FAQ
Can I increase my overdraft limit?
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.
What’s the average business overdraft interest rate?
Interest rates on a business line of credit in Australia can vary between 14.95% and 24.93%. The average interest rate for a secured line of credit will be between 14.95% and 18.95% and for an unsecured line of credit between 18.95% and 24.93%.
Can I get an unsecured business overdraft?
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.