Key Takeaways
- An unsecured overdraft is a line of credit that can be used over and over again to pay for short-term business needs.
- It connects your business bank account to an overdraft facility, which lets you go over your limit by a certain pre determined amount.
- The limit will reset after you pay back what you borrowed. You don't have to pay interest on the whole limit, just the interest on what you borrowed.
- Australian businesses can easily get an unsecured overdraft because they don't need to put up any business assets as security.
- Unsecured overdrafts have higher interest rates than secured overdrafts, but the exact rate you pay will depend on your financial situation and the lender's policy.
- To keep your overdraft costs down, check your usage often and make payments regularly.
Cash flow can change during the year when you run a business. To stay afloat, it’s important to have quick access to cash during slow times. This is when a business overdraft comes in handy. An unsecured overdraft can be a lifesaver during low periods and when unexpected situations happen. Let’s look into unsecured overdrafts, how they work, and why they might be the best choice for your business.
What is an Unsecured Business Overdraft?
An unsecured business overdraft is a line of credit solution that allows businesses to draw more money than they currently have in their business bank accounts. This type of financing does not require a property to secure the facility.
How Do Unsecured Business Overdrafts Work?
With an unsecured business overdraft, your business bank account is linked to a line of credit, allowing you to draw funds up to a preset limit. You can access this credit whenever you need it, and you only pay interest on the funds you use. As a revolving line of credit, once the overdraft is repaid, you can draw on it again within the limit.
For example, if your business has an overdraft limit of $500,000 and you need $200,000 to cover expenses, you can access those funds immediately. You only pay interest on the $200,000 you’ve used, not the entire overdraft limit.
What Can You Use an Unsecured Overdraft For?
An unsecured business overdraft can help you pay for your day to day costs and keep your cash flow steady. Here are some times when an unsecured overdraft can be useful:
- Working Capital Needs: When cash flow is low for a short time, you need to cover your daily operating costs like utilities, payroll, payments to suppliers, and more.
- Seasonal Changes: Many businesses have slow times during certain times of the year. An overdraft can help you get through the tough times until your business picks up again.
- Emergency Expenses: Overdrafts can help you pay for unexpected costs quickly, like fixing broken equipment or buying stock quickly.
- Short term Opportunities: An unsecured overdraft can give you the cash flow you need if a business opportunity comes up that needs funding right away.
An unsecured overdraft is not always the best type of financing for every situation. For instance, if you’re making large purchases like a fleet of vehicles or a commercial property, you might be better off looking at regular business loans or other types of financing.
Unsecured Business Overdraft vs. Secured Business Overdraft
The main difference is the use of assets as security for the line of credit. Secured overdrafts usually require a mortgage over property security. Since this lessens the risk for lenders, secured overdrafts can have lower interest rates than their unsecured counterparts. Meanwhile, unsecured overdrafts are a quicker alternative that’s ideal for businesses that have no assets or don’t want to tie up assets in financing. Unsecured overdrafts from banks can, on occasion, have rates as low as a secured overdraft.
Here’s a quick comparison:
| Feature | Unsecured Business Overdraft | Secured Business Overdraft |
|---|---|---|
| Security Required | None | Yes |
| Approval Process | 1-2 day approval, as no valuation of assets is required | Assessment, valuations, and approval process takes longer (approx. 4 weeks) |
| Interest Rates | Usually higher (but not always) | Generally lower, as the loan is backed by property and more likely to be from a bank |
| Credit Limits | Dependent on serviceability, about the same as secured overdrafts | Dependent on serviceability, about the same as unsecured overdrafts |
Unsecured Business Overdraft Rates: What to Expect
Non-bank lenders usually charge higher rates for unsecured business overdrafts than banks do for secured overdrafts. The lender, your business’s financial standing, and your credit history can all affect these rates. Some lenders charge a facility fee or line fee for keeping the overdraft open, while others do not. Fees can change the real cost of your overdraft by a lot.
How to Apply for Australian Financing for Unsecured Overdraft
In Australia, the process for applying for an unsecured business overdraft is usually pretty simple. You need to do this:
1. Apply Online Quickly
Fill out our online form to send in your application. We’ll help you figure out how much funding you need and how your business is doing financially so you can find the best solution.
2. Official Application
We will send in your application once you agree on an overdraft solution. Send in any documents that the lender needs. We’ll make sure you get the best rates and the quickest turnaround times for your facility.
3. Approval
After approval, you are free to use your overdraft anytime. Don’t forget to keep an eye on your line of credit and pay it off on time to keep interest costs low.
How to Get the Best Unsecured Business Overdraft
It can be hard to find the best deal on an unsecured business overdraft in Australia because there are so many lenders and products to choose from. If you work with a qualified broker like Dark Horse Financial, you won’t have to compare lenders and look at every detail of different overdraft products. We can help you find the right lender for your business who can give you the best rates and terms.
Tips for Managing an Unsecured Business Overdraft
You have more freedom and flexibility with an unsecured business overdraft, but you need to be careful with it so you don’t end up paying more than you need to. Keep this in mind:
- Check Your Usage Often: Keep an eye on how much you borrow and how often you use the overdraft. Check your cash flow often to make sure you’re not relying too much on credit.
- Pay It Off Quickly: Because you only pay interest on the money you use, it’s best to pay off the overdraft as soon as you can to keep interest costs down.
- Don’t Keep Overdrawing: There might be a bigger problem with your business if you find that you’re relying on overdrafts too much. You might want to check out other forms of funding or keep a closer eye on your finances.
In Conclusion
For small and medium sized businesses that need to manage short term cash flow needs, an unsecured business overdraft can be a flexible and easy to get loan. You can use an overdraft to help with cash flow and deal with emergencies, or as a general financial safety net.
To apply, contact a business loan broker to help you compare lenders and go over your choices and get the best deal.
Most importantly, be careful with your overdraft so you don’t borrow too much or always rely on your line of credit. A well maintained overdraft facility can be a huge help and boost for your business, especially when you’re short on cash.
Get an Unsecured Business Overdraft
An overdraft might be the answer if you need easy and flexible funds for your business. We're experts in overdrafts, and we'll help you get the best rates and terms for your business.
