Having a bank overdraft facility on your loan can prove highly beneficial, enabling you to effectively manage and bridge temporary cash flow shortfalls. Several lenders offer attractive interest rates on overdraft facilities, presenting a convenient and cost-effective approach to meeting your business’s working capital requirements.
What is a Bank Overdraft?
A bank overdraft can be likened to a type of loan, as it provides a short-term financing option offered by many Australian banks. If you maintain a good credit record, your bank may give you an overdraft facility linked to your account. While some banks grant overdrafts automatically, others require an application process.
Approval for an overdraft primarily depends on the customer’s creditworthiness, and while new customers may be eligible, not all individuals get this facility. The bank can determine eligibility, often declaring that overdrafts are subject to the customer’s financial status. Basic bank accounts or those with limited credit history may not get an overdraft. The same applies to individuals who have recently experienced bankruptcy.
How Does a Bank Overdraft Facility Work?
Utilizing an overdraft facility allows you to spend more than the available balance in your account. There are two ways this works. Here are the two types of bank overdraft:
Authorised Overdraft
Also referred to as an arranged overdraft, this type is pre-agreed upon with the bank before someone overdraws.
Unauthorized Overdraft
Commonly known as an unplanned overdraft, this occurs when someone overdraws the account without prior agreement.
While certain banks provide overdrafts without charges, many have specific fees. Banks must apply a consistent interest rate, known as the annual percentage rate, to all overdraft accounts. This system replaces the previous structure that involved confusing monthly or daily fees.
In some cases, financial institutions may require collateral as security for the overdraft. Acceptable assets include bank deposits, shares, cars, or real estate properties. Failing to repay the debt could result in the loss of the pledged support.
Alternatively, an unsecured overdraft does not require tying it to an asset, but the credit limit is typically lower. Secured overdraft facilities often benefit businesses as they can cover unexpected expenses. Personal overdrafts may be unsecured, especially if rainy days are infrequent.
Advantages of Bank Overdrafts
Bank overdrafts offer several benefits that many people find helpful. Like credit cards, overdrafts provide revolving credit, allowing you to spend up to your authorized limit without exceeding it. You can choose the amount in full and reuse the facility the next day. Here are some advantages of bank overdrafts:
No Minimum Opening Deposit
Typically, an overdraft account does not require a minimum deposit to open, making it accessible to a wide range of customers.
Easy Application and Approval
Meeting simple requirements can make applying for and getting approved for an overdraft facility easy.
Alternative Source of Funds
An overdraft provides an additional source of money when you have exhausted other resources, giving you financial flexibility.
Versatile Use of Funds
You can use the funds from your overdraft withdrawal for various purposes, such as paying monthly bills, covering medical expenses, or funding a vacation.
Avoidance of Payment Rejection
If your account balance reaches zero, the bank will cover any payments you wish to make, preventing them from being rejected.
Covering Scheduled Bill Payments
In the event of insufficient funds, the bank will make scheduled bill payments on your behalf.
Interest Charges Based on Usage
Interest is typically charged only on the amount you spend from your overdraft, so you’ll only have to pay regular fees if you don’t use it.
Convenient Access to Funds
You can withdraw the needed amount from your overdraft anytime and anywhere using various methods such as ATMs, in-branch visits, online banking, or mobile banking.
Flexible Repayment Options
While timely repayment is advisable, you can choose when to repay your overdraft. It can be beneficial for individuals who credit their salaries to the account. You can schedule Repayments when funds enter your bank account.
Higher Spending Capacity
An attractive overdraft limit allows you to spend the necessary funds for specific purchases, giving you greater purchasing power.
How Is an Overdraft Paid Back?
An overdraft is typically repaid automatically as funds are deposited into your account—such as your salary or other incoming payments. As money comes in, it reduces the overdrawn balance. Most banks or credit unions will also set a timeframe for when the overdraft must be fully repaid, so it’s important to stay within those terms to avoid additional fees or charges.
Does the Business Overdraft application include a credit check?
Yes, business overdraft applications almost always include a credit check. Lenders, such as AMP and ANZ, require consent to access commercial and personal credit reports to assess financial history and risk. These checks are standard for both secured and unsecured, as shown in CommBank’s and NAB’s application processes.
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