Unsecured Overdraft for Business: How It Works in Australia

An unsecured overdraft is a business overdraft facility that lets a business draw funds beyond its account balance, up to an agreed limit, without nominating a specific asset as security. Each lender sets its own limits, interest, fees and eligibility under its own policy, so terms differ from one facility to the next. Business Loan Store compares cashflow finance from verified lenders and is not a lender itself.

If a flexible buffer for day-to-day cashflow is what your business is weighing up, you can see if you qualify.

What is an unsecured overdraft?

An unsecured overdraft is a facility attached to a business account that lets the business spend past a zero balance, up to a limit agreed with the lender. “Unsecured” means no specific business or personal asset is put up as security.

Think of a business that pays suppliers at the start of the month but gets paid by customers weeks later. An overdraft can help bridge that gap, within whatever limit the lender sets.

Even without nominated security, a lender may still set other conditions under its own policy. Features also differ between lenders, so the details would need to be checked in each lender’s own published material.

business.gov.au has general information on finance and funding options for Australian businesses.

How does an unsecured overdraft generally work?

An overdraft generally works as a revolving limit: the business draws funds when needed, repays them as money comes in, and can draw again within the agreed limit.

Interest and fees are calculated under the lender’s own terms. For example, the terms set out whether interest applies to the amount drawn or to other amounts, and which fees apply. These details would need to be confirmed in the lender’s documents.

As general context, interest rates across the economy are influenced by the official cash rate, which the Reserve Bank of Australia publishes.

Lenders typically review overdraft facilities from time to time under their own policy. How often a facility is reviewed, and what the review involves, depends on the lender.

How does an unsecured overdraft compare with other cashflow finance?

The main difference between secured and unsecured facilities is whether an asset is nominated as security for the borrowing. Neither option suits every business. The terms that apply come from the individual lender’s policy.

An overdraft is also different in concept from a term business loan. A term loan is usually paid out as a lump sum and repaid over an agreed period, whereas an overdraft is drawn and repaid as needed within a limit. Business Loan Store compares business loans as well as cashflow finance, including unsecured business loans.

Invoice finance is another cashflow-finance category that Business Loan Store compares. With invoice finance, funding is generally linked to a business’s unpaid invoices rather than to an account limit.

What do lenders generally consider?

Lenders generally look at a business’s overall financial position. Criteria vary by lender policy. Common factors include:

• how long the business has been trading
• cashflow and turnover patterns
• the quality and currency of financial records
• the credit history of the business and its principals

Some lenders may also ask about guarantees or other conditions, even on an unsecured facility. These requirements would need to be confirmed in the lender’s terms.

All applications are subject to lending criteria, assessment and approval, and no outcome is assured.

Keeping business records organised and up to date can make it easier to provide information when asked. The ATO publishes guidance on business record keeping.

What should be checked before applying?

Before applying, it helps to understand exactly how a facility works and what it may cost under that lender’s terms. Useful questions to ask a lender include:

• How is interest charged, and on what balance?
• Which fees apply, and when are they charged?
• How and when is the limit reviewed?
• What happens if the account goes over the agreed limit?

Read each lender’s product documents and disclosure material before committing.

Moneysmart offers general guidance on borrowing and comparing credit. ASIC also publishes regulatory resources on credit and credit licensees for general reference.

The ATO covers the tax treatment of business borrowing costs. A registered tax agent or accountant can help with individual circumstances.

How can Business Loan Store help with comparing cashflow finance?

Business Loan Store is an Australian business-finance marketplace that offers comparison, lender discovery and a Help Centre. It does not lend money itself. You can read more about The Business Loan Store.

The marketplace compares business loans, cashflow finance, invoice finance, equipment finance and commercial property loans from verified lenders. It can also match a business with lenders.

By default, results are listed alphabetically by lender, and no lender pays to appear or to be ranked higher. Third-party lender details come only from each lender’s own published material.

Contact is through the website form, Monday to Friday, 9am to 5pm AEST.

This is general information only and does not take into account your objectives, financial situation or needs. All applications are subject to lending criteria, assessment and approval. Fees and charges may apply.