Business overdraft explained: Is it right for your business?

When cash flow becomes unpredictable, a business overdraft can offer the breathing room you need to stay on top of expenses. Whether it’s covering wages during a slow month or managing late customer payments, an overdraft gives you flexible access to funds—straight from your transaction account.

In this article, we’ll explain how business overdrafts work, their pros and cons, and what alternatives you might consider if an overdraft isn't right for you.

What is a business overdraft?

A business overdraft is a short-term cash flow solution that lets you withdraw funds even after your account balance has reached zero. Your business can spend more than it has in its transaction account, up to an approved limit, and it works as a revolving credit—you access funds as needed, repay them, and then use them again.

The way it works is: once your overdraft facility gets approved, it is linked to your business transaction account. If the balance goes below zero, you’ll automatically start using the overdraft. Plus, you only pay interest on the amount you use, which makes it a cost-effective way to manage temporary cash gaps.

Common ways of using a business overdraft

Overdrafts can be used for a variety of business purposes, including:

• Bridging cash flow gaps
• Covering unexpected expenses, like equipment repairs or urgent stock purchases
• Paying staff during slow periods
• Stocking up on inventory
• Maintaining operations during off-peak times
• Paying ATO and other bills on time
• Dealing with project-based payment delays

Pros and cons of getting a business overdraft

Like any other business finance solution, overdrafts have both advantages and drawbacks:

Pros

• You get flexible access to funds and don't have to reapply each time you need cash
• Pay interest only on the amount borrowed, not the entire limit
• Helps smooth out cash flow during revenue delays or seasonal downturns
• There's no rigid repayment schedule—repayments happen automatically when cash flows into your business account
• Many banks offer unsecured business overdraft options, particularly to established businesses
• Once approved, the funds are instantly available in urgent situations—no need to wait for approval each time

Cons

• Business overdrafts often come with higher interest rates
• It's not the best option for long-term financing or large investments
• There are additional costs, including setup fees and monthly service fees
• For higher limits, you often need to opt for a secured overdraft—and you may need to provide a director's guarantee
• Since it's easy to access, businesses may become reliant on overdraft funds

Is a business overdraft right for your business?

An overdraft may be the right fit for you if you:

• Need a flexible buffer for day-to-day cash flow and occasional shortfalls
• Have seasonal or uneven revenue
• Don't want to be locked into structured repayments
• Want a fast, low-friction way to access funds

Alternatives to a business overdraft

Line of credit

A business line of credit is similar to an overdraft in that you can draw from it when needed, and as you make repayments, your available balance goes back up, ready for future use.

However, it typically comes with higher limits, a more structured approval process, and the funds may sit in a separate facility from your everyday bank account. If you have ongoing working capital needs but would prefer to have more control and visibility over your borrowing, a line of credit may be more suitable.

Business credit card

A business credit card is a revolving credit facility that allows you to make purchases up to a pre-approved limit—like a personal credit card but for business-related expenses. Similar to an overdraft, it offers short-term funding, but it's generally more suitable for regular, smaller-scale spending rather than bridging cash flow gaps or covering larger, unforeseen costs.

Plus, credit cards have fixed repayment schedules, and if you don’t repay the full balance by the established due date, interest is charged on the remaining amount. Credit cards also typically come with higher interest rates but may offer rewards programs and interest-free periods that can be valuable if used strategically.

Short-term business loan

Both short-term loans and business overdrafts are designed to help you manage cash flow gaps or address pressing financial requirements. Unlike an overdraft, though, a loan is a lump sum disbursed upfront and repaid in fixed instalments over an agreed term.

One benefit of getting a short-term loan is the certainty. You know how much you’re borrowing and what the repayments will look like, which makes it a good solution for funding specific expenses with defined outcomes—such as buying a business vehicle or investing in a marketing campaign.

FAQs

How much does a business overdraft cost?

The cost of a business overdraft depends on the lender and how you use it. Typical charges include interest, establishment fees, monthly/annual fees, and over-limit fees.

Can sole traders get a business overdraft?

Yes, sole traders can apply for a business overdraft, although eligibility will depend on factors like your trading history and turnover, personal and business credit score, and cash flow.

What happens if I exceed my overdraft limit?

If you go beyond your approved limit, you may be charged an over-limit fee. Your lender may also reduce your facility or ask for immediate repayment, and your credit score could also be negatively impacted. Setting up alerts or auto-transfers can help you avoid going over the limit.