Business Overdraft - What You Need To Know


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Shaunby Shaun McGowan

A business overdraft is a revolving credit facility linked to your business account. Overdrafts can be secured or unsecured, and business owners use this type of finance to access funds when the amount needed is greater than that in their business trading account.

Business Overdraft

How business overdrafts work

A lender gives approval for a business to access a certain amount of credit, which it can access as and when it needs to. Once a business is approved for an overdraft amount, it is generally able to access funds within 24 hours. The limit will be set by the lender, and will vary based on the turnover of the business and your credit history.

  • Any amount which is withdrawn - plus interest - is repaid through scheduled payments
  • Interest will only accrue on the amount you withdraw
  • Once the overdrawn amount is repaid, you will cease to pay interest
  • There may be a minimum repayment amount or an interest-only payment minimum

If annual business turnover is less than $5m, you will often be required to make weekly payments; if turnover is greater than $5m, you may opt for either weekly or monthly repayments.

Secured versus Unsecured overdrafts

Businesses can apply for either secured or unsecured overdrafts:

  • Secured - Uses collateral as security and will often result in a lower interest rate.
  • Unsecured - Allows access to funds without risking existing assets at the cost of higher interest rates.

Business overdraft details

Overdraft Limits

A business can increase the initial limit approved by the lender if it is able to demonstrate an ability to meet the repayments of the new amount. Generally, a business will choose to increase their limit in relation to increased business turnover.

Terms

Terms will vary between lenders, and often range from three months to five years. Regardless of the agreed term, a business overdraft lender may review the facility agreement at any time should the performance of your business change.

Fees

Generally, you will be required to pay a facility fee to maintain a business overdraft. This is an annual fee charged by the lender which ensures you have access to the funds when you need them.

There may also be fees applied when changing your limit, or establishment fees charged by the lender when setting up your overdraft. Each lender will have their own fees and it’s important that you review these before finalising an agreement.

Interest

Interest rates will vary from lender to lender and will be dictated by whether the overdraft is secured or unsecured. Secured business overdrafts will start from 14.95% while unsecured overdrafts will start from 18.95%.

Interest will only be calculated on the amount withdrawn and each time you withdraw an amount.

Limits $25,000 - $500,000
Terms 3 months - 5 years
Facility Fees $300+
Interest Rates 14.95% - 24.95%
Minimum Operating Time 3 years

Who uses overdrafts?

Overdrafts are used by a wide range of businesses in Australia, such as retail, wholesale, manufacturing, and more, and for an equally vast number of reasons:

  • Purchasing stock and inventory
  • Financing new business developments
  • Settling invoices and covering overdue invoices
  • Paying for expenses
  • Managing supply chain issues and working capital

How to apply

Banks offer business overdrafts along with specialist business finance lenders. Businesses will benefit from faster approval through non-bank lenders, and many offer simple online applications. Depending on the amount of money you wish to access, you may only be required to provide basic details and business bank statements.

In general, the standard qualifying criteria include:

  • A valid Australian Business Number (ABN)
  • Australian citizenship or permanent residency
  • A GST-registered business
  • Annual turnover of at least $250,000
  • Minimum operating time of three years

As with all business-specific finance, you must intend to use the funds predominantly for business purposes.

Other ways to secure credit for your business

A business overdraft is often suitable when the business requires cash to cover a number of different business expenses. However, overdrafts aren’t always the best choice for securing new business assets or financing vehicles. There are many different types of business loans which are used for a specific purpose:

  • Small Business Loans - Used when the business doesn’t meet minimum operating-time criteria
  • Equipment Finance - Used to purchase or lease specific assets for a business
  • Invoice Finance - Used to access cash through selling outstanding invoices to a third party
  • Bad Credit Business Loans - Used when business finance would otherwise be declined due to poor credit history
  • Chattel Mortgage - Used for financing business vehicles

Summary

Business overdrafts are best used when a business with high turnover needs irregular access to funds for a variety of purposes. There is a freedom in how the funds can be used when compared to other types of business finance.

Pros Cons
  • Access between $25,000 to $500,000 as needed
  • Can be used for any business purpose
  • Interest is only applied to the amount withdrawn
  • Apply online and get fast approval from specialist lenders
  • Secured overdrafts offer lower rates
  • Not suitable for new businesses
  • Turnover will dictate your repayment frequency
  • Unsecured overdrafts have higher rates of interest applied
  • Other types of business finance are more suitable for certain purchases

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