As a business owner, you are probably aware that cash flow can be a major pain point. That’s why you may want to consider if a business overdraft is a right solution to support your cash flow needs. An overdraft on your business account can be an ideal solution when you need additional funds for a short time.
What is a business overdraft?
A business overdraft is extra funds available in your account for when you need them. When you’re setting up a business account, sometimes you have the option of applying for an overdraft on that account. This overdraft is classified as a preapproved loan amount, which is often unsecured. However, you can find some accounts that will offer a secured overdraft, and these may offer you a higher amount of funds and a lower interest rate. For a secured overdraft, you’ll need to offer something of value to use as security; this may include property and vehicles.
The specific conditions of your overdraft will depend on your type of business and how much you feel you may need. An overdraft is a little like a small business loan, but you have access to the money at any time. The business overdraft interest rate is set by your lender and calculated according to the conditions of your overdraft.
When looking for a business overdraft, always check to see if any fees are applied. For example, your financial institution may charge an overdraft line fee, and this is where you pay an ongoing fee to keep the line of credit open and ready to use. A line fee is often calculated as a percentage, which means that the less you’re approved for, the lower your monthly fee.
Why choose a business overdraft?
There are many reasons why your business may benefit from a business overdraft. The most common use for an overdraft on your online business account could be to provide support when you need to make an unplanned purchase or to cover a gap in cash flow. If you need to make a purchase quickly and pay back the cost of purchase later under set terms, an overdraft can be an excellent solution.
A business overdraft is a way to access money in a short amount of time. It is best used when you have a short-term cash flow issue, for example, when you are waiting for some invoices to be paid. You can use the overdraft facility to pay for what you need, and when your invoices are paid, you can pay down your overdraft. When using an overdraft for business, it can cover any unexpected bills or enable you to purchase products for your business.
All businesses will go through periods where sales do not meet expectations or invoice payments aren’t made on time, and an overdraft can help you keep up to date with your financial obligations. An overdraft is often used as a short-term solution. Having a business account with an overdraft facility offers you financial flexibility and the interest is only calculated on the funds you use.
Who can apply for a business overdraft?
A business overdraft is limited to registered businesses and sole traders with a valid ABN. Many financial institutions offer business overdrafts that can be attached to a small business account. Only the owners or directors of a company can open a business account and (if available with the financial institution you choose) apply for an overdraft to be a part of that account. Prospa’s brand new business account will have an overdraft facility available in the near future – watch this space.
There may be specific requirements to be approved for an overdraft, and these will be detailed when you apply. An overdraft is very similar to a line of credit; and it can be good to have these backup funds available if you’re facing any unexpected funding gaps, for example, if you have a stock purchase to complete but are also waiting for an invoice to be paid. In this scenario, you can rely on the overdraft to meet your purchasing commitments without waiting for other funds to clear.
When you apply for a business overdraft with your bank or financial institution, you should check the interest rate and any fees or charges that may apply. All of these details about your overdraft for business should be covered in the terms and conditions. You may find that unsecured overdrafts have a slightly higher interest rate and limited available funds than secured overdrafts. However, unsecured overdrafts may be better suited if you prefer not having any of your equipment or other items tied to a loan.
At Prospa, you can open a business account online in a matter of minutes. Coming soon, will be the option of opening a business account with an overdraft. When opening your new account, you’ll need to provide proper identifying documents, such as a driver’s licence. You can send this to our team electronically as either a scanned page or an image file (provided it is clear and legible).
Our application form will only take a few minutes to complete, and our customer service team is just a phone call away if you need any assistance. If the overdraft is not the right solution for your business, you may consider applying for one of our small business loans instead. As a small business lender, we are interested in finding the right solution to help support your business.
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