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Save time
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Ones you’re actually eligible for
No credit score impact
Even when comparing lots of options
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From application through to overdraft set up
What is a business overdraft?
A business overdraft gives a business ongoing access to finance up to a limit. The business can dip into its overdraft whenever it needs funds, and only pay interest on the amount drawn down.
A business overdraft typically allows a business to transfer funds to its transaction account as needed. The transfer of funds is instant, making it a popular source of cashflow for ongoing expenses. It's similar to a business line of credit.
A business overdraft is a popular form of business finance used in almost every industry, for managing working capital, purchasing inventory, and much more.
What you get with a business overdraft
- Access credit limits from $2,000 to $2 million
- Interest rates generally range between 14.35% p.a. - 25.00% p.a.
- Interest only charged on amount withdrawn
- Overdraft fees may be charged on application and/or annually
- Business overdrafts can be secured or unsecured
- Applications assessed according to business turnover
- Usually quicker than applying for a loan
- Offered by banks and non-bank lenders
How a business overdraft works
Some people might still think of a business overdraft as a facility linked to a transaction account offered by a bank. But today, business overdrafts are offered by a range of non-bank lenders offering instant and ongoing access to funds.
Business overdraft vs term loan
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
"Compared to a term loan, a business overdraft offers more flexibility and longevity – the finance available is constantly refreshing. Instead of needing to reapply for funds every time, you can dip in and out. Term loans are often there just to fix a problem, or capitalise on a one-off opportunity."
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
7 steps to getting a low-cost business overdraft
1. Compare options beyond your existing bank
If you decide to get a business overdraft set up, applying with the bank you already have a transaction account with might seem like the most obvious first step. But you should compare your options first. Like any kind of business finance, the interest rates, fees and other terms on business overdrafts can vary a lot depending which provider you go with.
Like any kind of business finance, the interest rates, fees and other terms on business overdrafts can vary a lot depending which provider you go with.
2. Look for the lowest fees possible
With a business overdraft, expect to pay an application fee as well as a line fee, which will likely be quarterly or annually. The lender charges a line fee for keeping the overdraft facility open and it applies whether you use the overdraft or not. Line fees are either a flat amount or can be a percentage of the credit limit.
There can also be hefty fees if you draw down funds beyond your overdraft limit.
In our experience, not all lenders advertise the actual fees they charge. Instead, fees are "determined upon application" or something similarly vague. This is where we come in. We'll help you understand the business overdraft fees charged by multiple lenders, without you needing to apply first.
3. Business overdraft interest rate
Data from Money’s lender database shows business overdraft interest rates in 2024 can range from around 14.35% to 25.00% p.a.
That's quite a difference from highest to lowest. Particularly if you will have funds overdrawn on a regular basis, it’s important to look for the lowest interest rate possible (even though you’ll only be charged interest on funds withdrawn).
Your interest rate will be tailored to your business depending on factors like annual turnover and how long it’s been operating. Your personal credit rating may also be a factor.
Did you know? Business overdraft fees and interest may be tax deductible if the funds borrowed are used for business purposes, according to the ATO.
4. Consider whether a secured or unsecured overdraft is best
You generally have the choice of a secured or unsecured business overdraft. A secured overdraft will be backed by an asset you or your business owns (usually residential or commercial property).
Interest rates and fees are usually lower on secured overdrafts. But if you need a quick approval, an unsecured overdraft is usually more straightforward to apply for.
5. Pick a suitable overdraft term
Terms on a business overdraft range from 3 months to 5 years, or some involve a ‘revolving’ line of credit with no set term. Even if you agree to a set term with a lender, they may be able to review the overdraft facility at any time.
Importantly, if you only need help with cash flow for a short period of time or one-off project, avoid signing up for an overdraft with a long or open-ended term. You'll likely be charged overdraft fees long after the overdraft has served its purpose.
6. Pay attention to the repayment requirements
A traditional bank overdraft typically won't have set repayment requirements. You essentially repay it as and when funds are deposited into your account. This is obviously a very flexible option. It can also be very expensive as interest charges are added.
Most of the specialist lenders we work with set a minimum principal repayment amount on business overdraft facilities. This means there will be a limit on how much interest you will pay over time on the amount overdrawn.
7. Choose your overdraft limit carefully
There are two ways you could arrive at a suitable overdraft limit for your business:
- What the lender is willing to offer you as a maximum credit facility; and
- The amount you actually need.
Some fees are charged as a percentage of your limit. In other cases, there are fee bands. A higher overdraft limit could move you into a higher fee band. Either way, a higher overdraft limit than your business needs will cost you more.
Who does a business overdraft work best for?
If your business has a high turnover and needs fast access to funds on an irregular basis, an overdraft may be suitable as it offers quick and reliable access to funds.
In our experience working with Australian businesses, industries commonly using a business overdraft include retail, wholesale, manufacturing, professional services, food and beverage, technology and automotive.
A business overdraft is generally not as well suited to long-term capital investment, like purchasing an asset. In that scenario, equipment finance, a business car loan or chattel mortgage may be a better fit.
We find that businesses using a business overdraft need cash flow really fast. That could be for paying invoices, paying staff, doing fit outs or just having some extra working capital.
With an overdraft, the funds are sitting there ready to go whenever you need them. At the click of a button, the funds are transferred straight to you.
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
"We generally find more established businesses are attracted to overdrafts as a solution because they understand their cash cycles more. It could be stock purchases, it could just be when tax bills are due or they've got new contracts or whatever the reason may be for needing that injection from time to time."
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
How to use a business overdraft
Let’s look at an example of how a business overdraft might be used.
- A business is approved for an overdraft of $50,000
- The business withdraws $20,000
- The amount accruing interest is $20,000
- The remaining overdraft amount is $30,000
- The business is paid by a supplier and deposits $10,000 back into the overdraft facility
- The amount being charged interest is now $10,000 and the available limits $40,000
- The business is charged an annual fee for use of the overdraft (applies regardless of how much is withdrawn).
Business owner case study
Catherine Cervasio, Founder of Australian natural skincare brand Aromababy
“We took out an overdraft to fund inventory which meant we have stock available in order to take advantage of growth opportunities - especially critical for export where we wouldn't carry adequate stock levels otherwise. We decided on an overdraft (low doc, easy application) vs a loan due to ease and interest rates.”
Catherine Cervasio, Founder of Australian natural skincare brand Aromababy
Am I eligible for a business overdraft?
To qualify for a business overdraft, you’ll need to pass the lender’s credit assessment criteria:
- You are a sole trader, partnership, trust or company with a valid ABN
- You are an Australian citizen or permanent resident with a residential address in Australia
- Your business is registered for GST and has been operating for at least 6-12 months (minimum trading requirements vary by lender)
- Your business revenue is above the lender’s minimum limit
- You have a good credit history
- You intend to use the overdraft for business purposes
How to apply for a business overdraft
You can apply for a business overdraft online with most lenders. Many borrowers prefer non-bank and specialist lenders due to the fast approval time and access to funds offered by these companies.
The difference can be as significant as approval within 24 with a specialist lender, verisus four to six weeks with a major bank.
If you are looking for a business overdraft limit below $150,000, some lenders will only require business bank statements to grant approval. You could apply online and have the funds available the next day.
Secured versus unsecured business overdraft
Secured business overdraft
With a secured overdraft, an asset owned by you or your business serves as collateral for the finance. If you default on the overdraft repayments, the lender can recoup its money by making a claim on the asset.
Unsecured business overdraft
With an unsecured overdraft, there is no specific asset serving as collateral. But it’s important to remember that even unsecured finance contracts often include clauses allowing the lender to make a claim on assets in your name in the event of a default
Keeping business overdraft costs low
The fees on a business overdraft are usually dictated by the lender you choose, the size of the credit facility and, in some cases, how often it’s used. You can keep your costs low by:
- Choosing a lender offering low fees
- Only applying for as much as you need
- If there are fees per withdrawal, try to draw down larger amounts less frequently
Some businesses look at an overdraft as a bigger business credit card or charge card but without the big fees. For example, some of our lenders don't have monthly account keeping fees. You only pay interest on what you borrow. If you pay it off early, there's generally no early payment fees.
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