A business overdraft is a revolving credit facility linked to your business account. This allows you to draw funds when your account balance reaches zero (up to an agreed overdraft limit).
Key points about business overdrafts
- The median amount requested for a business overdraft is $50,000, according to Lend proprietary data
- Interest rates on a business overdraft range from 10-15% p.a., depending on the lender and finance type
- Business overdrafts can be secured or unsecured
- You only pay interest on the amount overdrawn, not the credit limit
How does a business overdraft work?
A business overdraft is a revolving line of credit that allows you to access funds when your business transaction account is in the red (below zero). There’s an overdraft limit. You then repay the overdrawn amount with interest through scheduled weekly or monthly payments. You only pay interest on the overdrawn amount, not the entire credit limit. If you don’t use the overdraft, you don’t pay interest.
For example, if you have an approved overdraft of $50,000 and withdraw $20,000, you only pay interest on the $20,000, not on the unused $30,000. If you repay $10,000, you pay interest only on the $10,000 that remains overdrawn.
An overdraft is attached to your pre-existing business transaction account. You can request an overdraft facility from most banks or non-bank lenders.
Is a business overdraft secured or unsecured?
A business overdraft can be secured or unsecured.
A secured overdraft is backed by collateral (security) such as residential or commercial property, vehicles or other assets. The reduced risk means that interest rates on secured overdrafts are lower. Most lenders will require collateral (e.g. property) for overdraft limits over $300,000.
An unsecured business overdraft facility doesn't require collateral, making the application quicker, although interest rates on unsecured finance are always higher. An unsecured overdraft is the most common option for small businesses as it allows them to access funds instantly without risking existing assets.
Business overdraft interest rates
Interest rates on a business overdraft range from 10-15% p.a., depending on the lender and whether the overdraft is secured or unsecured. Interest rates can be fixed for a period or variable. The interest is charged daily on the amount withdrawn until it’s fully repaid.
Business overdraft fees
Generally, you’ll be required to pay an annual facility fee (also called an overdraft line fee) to keep the business overdraft available 24/7. Some lenders also charge an establishment fee to set up your overdraft and additional fees when changing your credit limit. Each lender will have its own fees, so reviewing these before finalising an agreement is important.
Business overdraft terms
Business overdraft terms typically range from 3 months to 5 years, depending on the lender and your credit terms. Some lenders may offer a temporary overdraft, allowing a business to overdraw their account for a limited period (e.g. 1 month).
On the other hand, a revolving credit facility has no set term. Regardless of the agreed term, your lender may review the facility agreement at any time should the performance of your business change.
Business overdraft repayments
Most overdraft facilities have weekly scheduled repayments for businesses with a turnover of less than $5million. If your turnover exceeds $5million, you may opt for weekly or monthly repayments. There may be a minimum repayment amount or an interest-only payment minimum.
Business overdraft snapshot
|Overdraft limit||$25,000 - $500,000|
|Interest rate range||10-15% p.a.|
|Loan term||3 months - 5 years|
Who’s eligible for a business overdraft?
The standard qualifying criteria for a business overdraft include:
- Australian citizenship or permanent residency
- A valid ABN or ACN
- The minimum turnover required by your lender
- Minimum operating time of six to 12 months
- A good credit score — the minimum credit score for business lending is around 400.
- As with all business finance, you must intend to use the funds predominantly for business purposes.
How much can you borrow with a business overdraft?
According to Lend proprietary data, the median amount for an overdraft facility in Australia is $50,000. However, you can borrow between $5,000 and $500,000 with a business overdraft. Your lender will set your overdraft credit limit based on your business revenue and credit history. Keep in mind that you don’t have to take the maximum credit limit, and can apply for the amount you actually need.
Business overdraft pros & cons
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When to use a business overdraft?
You can use a business overdraft for any genuine business expenses. According to proprietary Lend data, the most common purposes businesses use an overdraft facility in 2023 include:
- Day-to-day capital: 52%
- Other (e.g. marketing, inventory, etc.): 22%
- Expansion: 12%
- Start a new business: 7%
- Renovations: 3%
How to get a business overdraft
The application process for a business overdraft is the same as with any other business finance. You’ll need to submit some paperwork and information about your business.
1. Supporting documents
Lenders will ask for financial documents to evaluate your business turnover and ability to repay your overdraft. They will ask for:
- Bank statements from the last six to 12 months
- Business registration and tax information (e.g. BAS statements, tax returns)
- Identification documents (e.g. driver’s licence, passport)
2. Your business information
Lenders will also look at your business profile and history. They will want to know you’ve been operating for the minimum time required, what goods or services you provide, how your business is structured (i.e. whether it’s a company, partnership or sole trading business), the industry you operate in, etc.
Both banks and specialist non-bank business finance lenders offer business overdrafts. Non-bank lenders offer faster approvals as they may only require basic details and business bank statements.
Who’s a business overdraft suitable for?
A business overdraft can help businesses plug holes in their cashflow. For example, your business sales could be seasonal and you may need money to pay your employees or your lease. Or, your business could be waiting on invoices but needs funds to cover immediate business expenses. Some businesses may also use an overdraft facility to take advantage of time-sensitive business opportunities, like obtaining a discount on inventory by buying bulk.
FAQs about business overdrafts
What’s the difference between a business overdraft and a business line of credit?
A business overdraft is linked to your business transaction account, while a business line of credit is a standalone finance product separate from your bank account. Keep in mind that while an overdraft is attached to your current business bank account, you’re not restricted to your existing lender and can request an overdraft facility from any lender that offers you competitive rates and terms.
Are interest rates on a business overdraft fixed or variable?
Some business overdrafts have a fixed rate for up to 3 years and then revert to a variable rate, while others may have a standard fixed or variable rate. Remember you'll only pay interest on your spending, not the overdraft limit.
Can I use a business overdraft to pay off other debts?
Yes, you can use a business overdraft for any genuine business expense, including consolidating or refinancing other cashflow debts like small business loans. You can’t use an overdraft to repay debt in arrears.
Is a business overdraft better than a business credit card?
A business overdraft is more suitable for businesses that need to cover cashflow shortfalls and short-term expenses. In contrast, business credit cards are commonly used for everyday expenses or big purchases to take advantage of interest-free days and earn rewards points on eligible purchases. Interest rates on business credit cards are usually higher than on unsecured and secured overdrafts.
Can I apply for a business overdraft if I have a bad credit history?
Yes, you may still be able to get a business overdraft if your credit history isn't perfect. Non-bank lenders will be your best option as they're more lenient with their eligibility criteria. You may initially only qualify for a lower overdraft limit, and your interest rate will be higher. You could alternatively apply for a bad credit business loan.
1. Proprietary data of small businesses who applied for an overdraft facility through Lend.com.au and have been operating for at least five years (2023).