Overdraft

An Overdraft is a type of Business Loan facility ideally suited to cover short term, i.e. less than 60 day working capital requirements – i.e. the debtor and creditor cycle.

Banks in Australia usually provide a basic overdraft facility, subject to a pre-arranged limit (known as an authorised overdraft limit).  This can be offered in a number of ways including: free of interest, subject to an average monthly balance figure or at the bank's overdraft lending rate.  It is common for this facility to have the interest rate vary with short term money market rates.

When a business exceeds its authorised overdraft limit, it goes into unauthorised overdraft which often results in them being charged one or more fees, together with a higher interest rate on the amount by which they have exceeded their authorised overdraft limit. The fees charged by banks can vary.

A business may also incur a fee if they present an item which their issuing bank declines for reason of insufficient funds, that is, the bank elects not to permit the business to go into unauthorised overdraft. Again, the level and nature of such fees varies widely between banks.

The form of overdraft most commonly used in Australia is a in essence a line of credit underpinned by a contractual relationship in which the bank promises to pay overdrafts up to a certain dollar limit. A consumer who wants an overdraft line of credit must complete and sign an application, after which the bank checks the consumer's credit and approves or denies the application. As with linked accounts, banks typically charge a nominal fee per overdraft, and also charge interest on the outstanding balance. Some banks charge a small monthly fee regardless of whether the line of credit is used. This form of overdraft protection is available to businesses who meet the creditworthiness criteria established by the bank for such accounts. Once the line of credit is established, the available credit may be visible as part of the customer's available balance.

In most circumstances when applying for other business loans the existing overdraft limit is considered to be the loan amount already on issue to the business regardless of the account balance in the facility.