A business overdraft is a feature of a business transaction account that allows funds to continue to be drawn once the account reaches a zero balance. An overdraft will have a pre-arranged limit which can be reached and paid back, and in this way it is often described as a type of Line of Credit (see below).
Most overdrafts are unsecured, especially where the limit is below $100,000, and have been approved based on the strength of the business’s financials.
A Business Line of Credit is usually a secured form of business loan. As such lines of credit have a higher limit than an overdraft and a lower interest rate. Like an overdraft there is a predetermined limit which the facility can be drawn to and paid back as funds become available.
While overdrafts are usually used to meet short term cash flow gaps and unexpected expenses, Lines of Credit are usually used to manage mid to long term seasonality, or used for investing, expanding, refinancing and covering larger operating expenses.
Business Overdrafts and Lines of Credit provide many benefits.
Most of the major and second tier lenders who offer business financing have an overdraft / line of credit facility. Some boutique and private lenders also can offer overdraft / line of credit facilities.
No, property security is not compulsory. An overdraft can be unsecured i.e. borrowing against the company balance sheet without the use of a real property as security. However, security may be requested if required for credit approval or the limit is relatively large.
Lines of Credit more have a tendency to be secured, due to their larger facility limits, and are typically secured by residential property, commercial or rural property, business assets or a combination of these assets.
Whether secured or unsecured, a personal guarantee will need to be provided where there is a trust or company borrower.
The costs involved with these facilities are:
As every business is different, these fees are based on how much you borrow, the strength of your business and the type of security provided.
The funds are to be used for business purposes, and facility needs to be kept under the pre-agreed limit of or a penalty rate will apply. Apart from that, there are no restraints on the use of funds.
Common uses of these facilities include:
Applying for a business overdraft or line of credit is similar to applying for any business loan. You will need to provide your:
You will also need to demonstrate clear credit history and all statutory payments and ATO liabilities must be up to date.