Small Business Overdrafts Explained – Bank and Non-Bank Business Overdrafts
Managing cash flow is a critical element to get right for any business. With the uncertainty of the current environment and the difficulty in making cash flow forecasts, it has become more important than ever.
A small business overdraft can provide instant access to cash and help cover a range of ongoing expenses, providing cash flow relief when your business needs it most. In this article we explain what is a business overdraft, we conduct a business overdraft interest rates comparison, and we discover if an unsecured business overdraft is possible.
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What is a Business Overdraft?
A business overdraft is an extension of credit that allows a business to access funds beyond the balance it has in its business transaction account. The business overdraft facility essentially means that a business can continue to make withdrawals/payments when their transaction account is empty, up to its agreed overdraft limit.
If you find that one of your clients is late paying you but you have employees and bills to pay at the end of the month, then dipping into your business overdraft could be an option. As with any type of business loan, whatever you spend using the overdraft is a debt you must repay. Interest is charged daily on the overdraft balance until it is fully repaid.
Most business transaction accounts have an overdraft facility available. Sometimes it can be an unsecured business overdraft or a secured business overdraft – with a bank you’ll be less likely to find an unsecured business overdraft but it is available.
|Loan Type||Securities||Terms||Avg Loan Size||Estimated Interest Rate|
Business Overdraft Interest Rates Comparison
Non-Bank Providers are more expensive than banks.
Through our research we’ve been able to identify unsecured business overdraft interest rates and fees as follows:
|Establishment Fee||Annual Fee||Advertised Business Overdraft Interest Rates Starting At|
|GetCapital (Non-bank lender)||$0||$395||9.95% – 19.95%|
As we can see in our business overdraft rates comparison, GetCapital and other online lenders are the cheapest in terms of upfront fees. There are none required to establish your business overdraft and they charge a fairly reasonable $395 annual fee. There are no annual fees for a business overdraft with St George Bank but they have easily the most expensive establishment fee at $3000. The ANZ business overdraft has both expensive establishment fees and annual fees. The ANZ business overdraft interest rates also start at the highest rate of any bank lender. The NAB business overdraft comes in pretty expensive across the board too.
The ‘interest rates starting at’ column makes for interesting reading. WestPac appears to be a strong option for borrowers who are looking for a bank lender. GetCapital also presents an interesting solution against a standard bank overdraft. It’s not uncommon for online lenders to have higher interest rates than banks but one should certainly put their rates to the test vs a bank. Business overdrafts are typically more expensive than term loans so we’d be very surprised to see banks offering unsecured overdraft facilities to many businesses at the rates they have advertised unless they have super strong cash flow and a top notch credit profile. We also like how GetCapital has been prepared to disclose its maximum interest rate. Realistically we would expect an unsecured business overdraft to have interest rates somewhere between 10-25%.
Comparing Business Overdraft Providers
As COVID is showing sign of “here to stay”, and business credit card companies and banks rejecting applicants left and right, business overdrafts are becoming one of the most popular product to be offered by Australian lenders. The vast majority of lenders including the industry’s largest lender, Prospa, are offering a overdraft facilities of between $100,000 and $2.5m.
A Non-Bank Alternative for a Small Business Overdraft
The very nature of a business overdraft lends itself to being provided by the transaction bank of your choice. It’s a credit limit on your transaction account that allows you to go into the red anywhere up to your limit. You could have an overdraft with another bank but chances are it’s the bank that handles your cash on a day-to-day basis.
Innovative new technologies are changing things though. A new product from GetCapital allows you to link your transaction accounts with a GetCapital business overdraft. So you can still have transaction banking with your bank of choice but the flexibility of an overdraft with GetCapital. Other lenders are making concise attempts at building a better and more flexible business overdraft facilities.
The Pros and Cons of a Business Overdraft
A business overdraft is one of the most straightforward ways to manage day-to-day cash flow shortages as and when they arise. That’s not to say it’s always the correct solution though and borrowers should be aware of both the advantages and disadvantages of a small business overdraft:
Easy access safety net. Simply continue to make payments from your account even if your balance falls below $0.
Re-use as and when necessary. Once you pay your overdraft back you’re free to use the funds again.
Flexible Repayments. Above your minimum repayment you can choose to pay off as much as you wish and as quick as you wish.
Multi-purpose. You can use a business overdraft for virtually any business expense.
You only pay interest on the funds you use.
Secured or unsecured business overdrafts available.
With business funding
Generally more expensive than most types of loan.
Application and ongoing fees apply, particularly from bank lenders.
Quick termination. This can be a benefit for the borrower to exit easily but similarly a lender may terminate the overdraft at any point.
Once linked you can seamlessly transfer funds from your GetCapital overdraft to any linked business account and manage cash flow as needed. Even if you change your transaction banking provider you can simply link your new bank account to the GetCapital business overdraft.
With no establishment fees and a very generous $750,000 credit limit it’s a solution that fits SMEs of all sizes. Unsecured business overdrafts are available, with no assets required as security in the lending process.
GetCapital does ask that borrowers have been in business for at least 3+ years, which may make some early-stage business ineligible.
Expedited Business Overdraft Loan Application
Valiant Finance is a trusted business loan marketplace that works with over 80 of Australia’s leading lenders. Small business overdrafts are still largely provided by Australian banks but there are some non-bank lenders starting to provide them too. Valiant works with both bank and non-bank lenders, meaning you can get a range of business overdraft solutions presented to you through one fast online application.
Final Word on Business Overdrafts
A business overdraft is one of the most popular forms of business finance available in Australia. It’s used in almost every industry to manage day-to-day working capital requirements, which can include purchasing stock, paying staff, and virtually any business purpose. Unsecured business overdrafts are available but you should expect to pay more for a business overdraft unsecured vs a business overdraft secured. The business overdraft rates comparison gives us an insight into the application and ongoing fees which are involved with a small business overdraft but it’s hard to judge exactly what interest rate your business will be eligible for on your own business overdraft.