Quick answer
An overdraft is a credit limit attached to a business transaction account that lets the balance go below zero, up to an agreed amount. You only pay interest on the part you're using, day by day, plus a line fee on the full limit in most cases. It's built for short cash flow gaps, not long-term purchases, and the bank can usually review or reduce it.
Key points
- A limit on your everyday account, not a separate loan you draw once
- Interest runs only on the overdrawn balance; a line fee usually applies to the whole limit
- Best for short, repeating gaps such as waiting on customers or paying BAS
- Usually reviewed each year and often secured by property or a guarantee
Think of an overdraft as a floor you can step below. Your business account normally stops at zero; with an overdraft it carries on down to an agreed number, say minus $50k, and comes back up as customers pay you. Nothing is “drawn down” as a lump sum. The facility simply sits under the account until you need it.
How an overdraft actually runs
The bank approves a credit limit and links it to your transaction account. Every payment that takes the balance below zero uses part of that limit, and every deposit pays it back. Because it refills automatically, it’s a form of revolving credit.
Two charges usually apply:
- Interest on the overdrawn balance, worked out daily and charged monthly.
- A line fee (sometimes called a limit fee) on the full approved amount, paid even in months you stay in credit.
There may also be an annual review fee and an excess fee if you go beyond the limit. Most business overdrafts from the major banks are secured, typically by a mortgage over property or a general security agreement, with a director guarantee alongside. Small unsecured limits do exist for established customers.
Why the overdraft matters to lenders
An overdraft tells a lender a lot. Statements that swing in and out of the limit show a business using it as intended. A balance pinned at the limit month after month suggests the facility has quietly become permanent debt, which makes a new lender cautious. Overdrafts are also typically reviewed each year, so they’re not money you can count on forever.
Banks are usually the cheapest place for this kind of facility, and if your bank offers one on reasonable security, it’s worth taking seriously. Where the bank says no, or won’t lift the limit, the realistic alternatives are a business line of credit from a non-bank, invoice finance if customers pay on terms, or a short working capital loan.
Turned down for a bigger limit? Tell us what the bank offered and we’ll look at what else fits.
A worked example in dollars
A Geelong electrical contractor has a $60k overdraft. In a typical month the balance dips to about minus $35k for two weeks while it waits on builders to pay, then returns close to zero.
| Cost item | How it’s charged | Illustrative monthly cost |
|---|---|---|
| Interest | On an average overdrawn balance of roughly $17k across the month | About $150 |
| Line fee | On the full $60k limit | About $60 |
| Total | About $210 |
The figures are illustrative only. The point is the structure: the line fee is the price of having the limit available, and the interest bill tracks how deeply and how long you dip. If the same contractor sat at minus $58k all month, interest would more than triple while the line fee stayed the same, and that pattern would signal it needs a term loan rather than an overdraft.
Related terms
A business overdraft is the commercial version of this term. Our head-to-head on overdrafts versus lines of credit explains the practical differences, and working capital covers the gap an overdraft is meant to fill.
Need a facility that flexes with your cash flow?
Whether the bank has said no, cut your limit or simply moved too slowly, there are usually other ways to cover the gap between paying out and getting paid. Give us a quick picture of your turnover, your current limit and what you need. It takes around a minute, and sending it leaves your credit score untouched. Your details stay with us instead of being passed around a crowd of lenders; one person reviews them and rings you. Accurate numbers mean the first suggestion is the right one.
Frequently asked questions
Is an overdraft the same as a line of credit?
They're close cousins. An overdraft sits on your transaction account, so wages and supplier payments flow straight through it. A line of credit is usually a separate account you draw from and transfer across. Pricing, security and review terms can also differ between lenders.
Do I pay interest on the whole overdraft limit?
No. Interest is charged on the balance you've actually drawn, usually calculated daily and debited monthly. Most banks also charge a line fee or limit fee on the full approved amount, whether you use it or not.
Can the bank cancel or cut my overdraft?
Overdrafts are generally reviewed each year and the terms usually allow the bank to change or reduce the limit. Banks that subscribe to the Banking Code of Practice have to follow its notice rules for small business customers, so read the review clauses in your letter of offer.
What happens if I go past the limit?
Payments may be dishonoured or the bank may allow them and charge an excess fee and a higher interest charge on the excess. Repeated excesses also look poor to the next lender reading your statements.
Can a non-bank lender give me an overdraft?
True overdrafts are almost always a bank product because they're tied to a transaction account. Non-bank lenders offer the closest alternative, a revolving line of credit, sometimes unsecured and sometimes backed by property.