What is a business overdraft?

A business overdraft provides relief, helps cover unexpected expenses and can relieve cash-flow bottlenecks. Think of it like a safety net for when you don’t have the cash in the bank to cover your expenses.

What is a business overdraft?

In simple terms, a business overdraft:

· Is facility attached to certain types of business loans
· Is similar to a line of credit, to an agreed limit
· Must be repaid in line with the terms set by your lender
· Must be repaid with interest at an agreed rate

The basics of a business overdraft

When you apply for a business overdraft you’ll likely need to show a solid business turnover, own or have equity in a property you can use as collateral to secure the loan, and be able to show a legitimate business need for the overdraft.

Overdraft policies vary between lenders, but you’ll usually be able to apply for an unsecured overdraft facility up to $100,000 without collateral. If you need more than that, your lender will likely ask you to put up an asset as collateral to secure the extra funds.

Interest rates on overdrafts also vary between lenders, but they are usually a little higher than the interest rate you’d pay on a standard business loan. Interest rates on overdraft facilities also tend to be variable, not fixed.

However, the good news is that you usually only pay interest on the funds you actually withdraw. For example, if you are approved for a business overdraft of $200,000 but only spend half of that, you’ll only pay interest on the $100,000 you’ve actually used.

In most cases, you can also choose to close the overdraft at any time. However, many businesses keep it open so they always have funds available to quickly cover any unexpected expenses.

Examples of when to use a business overdraft

A business overdraft can be useful if:

· You run a seasonal business: A business that makes the bulk of its income during a set period of the year but needs funds to pay expenses year-round could use an overdraft to cover costs before the next season begins. For example, a retail store that makes the bulk of its profits in the lead-up to Christmas may use a business overdraft to pay its staff during slower periods
· You work on long-term contracts: If you need to cover expenses throughout the project before you’re paid on completion, an overdraft can help. For example, construction companies that are paid the bulk of their fees after a project is completed may use a business overdraft to pay for staff and materials during construction
· You’re setting up a company: A business overdraft can help cover staffing and supplier costs during your launch phase – before you start earning income
· A client payment defaults: If one of your major clients defaults on a payment, the overdraft can cover your operating expenses until your cash flow recovers

A business overdraft can be a valuable safety net to pay for your business expenses while your income is low or delayed. However, be aware that you’ll likely pay higher interest rates than a regular business loan.

InfoChoice recommends that, before you make any financial decision, that you speak to a qualified adviser. Please read our InfoChoice Financial Services & Credit Card Guide for further information.

Let InfoChoice help you find a business loan with an overdraft facility to cover your business expenses.