What is a Business Overdraft?

As a business, you might be wondering whether an overdraft could be the right solution for your cash flow needs. But what exactly is a business overdraft? And why or when should you use one? Here’s a simple business overdraft definition, a quick description of how it works, and a few scenarios of when an overdraft could be used.

Business Overdraft: a definition

A business overdraft is a revolving loan that has a credit limit and allows a business to draw on funds up to a pre-agreed credit limit. As a form of revolving credit, an overdraft can typically be used for any business purpose.

How do Overdrafts work? 

Traditional bank overdrafts are linked to a business transaction account allowing you to ‘overdraw’ on your account, to your agreed limit. So should the transaction account reach zero, the banking would extend credit, allowing the account holder to continue withdrawing funds.

Some banks offer a “temporary overdraft” where the business can draw past zero on their account for a limited period of time (e.g. 1 month) but then must bring the account back to order within the specified period or incur additional fees. Banks vary in their policies on temporary overdrafts, but many restrict the number of times a business can use a temporary overdraft in a given 12-month period.

There is a fee associated with the use of the overdraft and interest on the loan. Interest is only paid on funds used.

Fees are charged on the credit used and typically applied daily. In addition, some banks may also charge a line fee, commitment fee or an undrawn facility fee. This fee can vary from 0.25% to 2% and is applied to the overall credit limit (or undrawn portion of the credit limit) and not the drawn amount as is the case with the interest charges.

Business Overdrafts offered by Australian banks typically require security in the form of residential or commercial property or alternatively, against term deposits or other cash assets held with the bank.

Why use an Overdraft?

Perhaps your business has a temporary cash flow shortfall while you wait for payment on invoices. Maybe you need immediate funds for a large purchase of goods. Or you need a cash boost in your predictable slow season.

A business overdraft is a good solution when you encounter any of these scenarios, as well as any other short-term or unexpected situations when extra business funds are needed.

Depending on your business needs, there are a number of reasons why a business overdraft could be a convenient and helpful solution:

• It’s a flexible way to access business finance: the funds are there, ready to use when you need them.
• Peace of mind: gives you the confidence that working capital is available for your business purposes.
• No need to set up a separate ‘line of credit’ facility; a business overdraft is linked to an existing transaction account.
• No need to make interest payments on a lump-sum loan you might not be using. The big advantage of an overdraft is that you only pay interest on the funds you use.

How to use an Overdraft

Business Overdrafts are good for the following:

• Businesses with lumpy cash flows, for example contracting businesses where staff are paid weekly but customers may pay only on job completion.
• Funding general working capital (meeting the timing gap between expenses and customer payments).
• Situations where additional cash is needed quickly and for a relatively short time frame. For example, when a business has the opportunity to purchase discounted stock.
• Meeting one-off unexpected operating expenses, assisting with cash flow during periods when business is slow.

Business Overdrafts are generally not well suited to the following situations:

• Financing long term capital expenditure (i.e. equipment purchases)
• Everyday use where there is no or little working capital in the business

The Shift Business Overdraft

Shift’s Business Overdraft takes the best features of a traditional overdraft and leverages technology to link the facility to any Australian banking transaction account. This makes the Shift overdraft a unique, stand-alone, portable cash flow management solution that provides an option beyond your existing bank.

The Shift Business Overdraft has other unique features, like a single annual fee and fixed principal & interest repayments.  

Applying for a Shift Business Overdraft

Applying for a Shift Business Overdraft is a quick and simple:

• Apply online in just a few clicks.
• A Relationship Manager will follow up to discuss your business circumstances and your needs.
• Apply for up to $1M. No financials or property security required for limits to $500,000.
• Interest rates, fees, terms and conditions will be clearly explained.
• There are no line fees, origination fees or drawdown fees. Only a $495 – $795 annual fee applies.
• Arrange weekly or monthly P&I repayments.
• In most cases, your business overdraft could be approved within 24 hours.