An overdraft offer can arrive with an interest rate you can’t justify, or a demand for security you’d rather not give. Either is a reason to look at what else could help cover the same gap.

Which alternative fits depends on what created the shortfall. Money sitting in unpaid invoices calls for a different product from a stock order or a broken van, and the quickest route to the wrong facility is to shop on interest rate before working out which problem you are solving.

How a business overdraft works

A business overdraft is a credit limit attached to your existing business transaction account. Your balance can run below zero up to an agreed amount, and each deposit pushes it back towards positive. You draw on it without applying each time, and there is no fixed repayment schedule to meet.

Banks are the main providers, and they generally expect you to hold the transaction account with them already. Limits tend to be smaller than on dedicated lending products, so an overdraft covers a few tight weeks more comfortably than a six-month stretch.

One of the most common alternatives to a business overdraft is a business line of credit. It works the same way through a different structure: you are approved for a limit, you draw what you need, you pay interest on the drawn balance, and repaid funds become available again.

Where overdraft applications get stuck

Timing is usually the first obstacle. A bank application can take weeks to reach conditional approval, particularly where a property valuation sits in the middle of it. Non-bank lenders often work in days, so when a supplier is waiting or a stock deal has a deadline, speed decides it before the rate comes into it.

Security is the other common sticking point. The Reserve Bank found that smaller firms more often report bank finance being available but not on terms they would accept, usually the rate or the collateral asked for. If you rent your premises or would rather not put the family home on the line, that narrows the offer before anyone discusses the limit.

Then there is the review. Overdrafts are usually reviewed annually, and a limit that was approved last year can be reduced or withdrawn at the review even when nothing has gone wrong in the business. A facility you are relying on through a quiet season is only as reliable as its next assessment.

Overdraft costs have two parts

Most overdrafts have two types of charges, and comparing them on the interest rate alone misses one of them.

The first is interest on the drawn balance, calculated daily on what you have actually used. The second is a line fee or facility fee, charged on your approved limit whether the money is sitting there untouched or not.

Take a $40,000 facility with a line fee of 2% a year and interest at 12%. These figures are illustrative, but the pattern holds whatever the rates.

Cost Draws $10,000 for two months Draws $25,000 for the full year
Line fee $800 $800
Interest $200 $3,000
Total for the year $1,000 $3,800
Line fee as a share of the bill 80% 21%

Same facility and same rate card. If you draw on it twice a year, most of what you pay buys access rather than borrowing, which is expensive on the money you actually use even at a competitive rate. If you draw all year, the line fee barely registers.

Establishment and annual review fees belong in the same comparison. If the terminology is a bit fuzzy for you, this guide covers what business loan terms really mean.

Finding a solution without borrowing

Some cash flow gaps are a funding problem. Others are a terms problem wearing a funding problem’s clothes.

If the gap comes from customers paying on 60 days while your suppliers want 14, a facility covers the symptom and you pay for it every month the mismatch lasts. Shortening your payment terms on new contracts, taking a deposit before work starts, or invoicing on delivery instead of at month end can help remove the gap so there’s nothing left to finance. Head to business.govt.nz for more tips on how to get paid on time.

Where the pressure comes from bills landing together instead of from your terms, the answer is scheduling. There’s more on that in this guide to handling GST, payroll and supplier bills at once.

You can also check how a prospective customer pays before you agree to terms. A credit agency will show you a company’s payment record for a small fee, so you know what to expect before you commit to 60-day terms.

Where the timing can’t be changed, where the gap is larger than your terms could ever close, or where the opportunity won’t wait for a renegotiation, funding could help.

Match the option to the cause

Once you know the gap needs funding, start with what caused it.

Payments you’re still waiting on

Invoice finance advances a portion of an invoice’s value before your customer pays, commonly up to around 85%, often within a day. Invoice a customer $18,000 on 60-day terms and you could have roughly $15,300 in the account tomorrow, with the balance less fees once they pay.

It suits B2B businesses on long payment terms, because the funding available grows as you win more work. The trade-offs are cost, since it can work out more expensive over a year than a business line of credit, and visibility, since your customers may be asked to pay the financier directly. There’s a fuller breakdown in this guide to invoice financing and its alternatives.

Costs that land before the revenue does

A business credit card covers short gaps using the interest-free period, provided the balance clears each cycle. Carry a balance past the interest-free period and the rate is higher than on most business lending, which is why this only works over a few weeks.

The catch is who accepts them. Suppliers, landlords and government billers often take bank transfer only, so a card covers part of your outgoings rather than all of them. Work out what share of your regular bills could actually go on it before you count on the interest-free days.

Stock that ties up cash for months

Trade finance pays your supplier when you place the order, whether they’re local or overseas, and gives you a window before you repay. That window is set to match your trading cycle and varies widely between lenders, from a few weeks to several months, so ask whether it covers yours from order to sale. Since it is written against specific transactions, expect documentation per order and a lender who understands your supply chain.

If you’re importing, work backwards from the freight timelines for the end of year rush when you set the window.

Equipment nearing the end of its life

Asset finance funds a vehicle, machine or fit-out with the asset itself as security. Because the lender holds something tangible, rates usually sit below what you’d pay on an unsecured facility, and terms stretch to match the working life of the equipment.

Avoid using a short-term cash flow facility for a five-year asset, or you’ll be repaying over months something that earns over years. Check the instant asset write-off rules before you buy, since the tax treatment can change what the purchase actually costs you.

Shortfalls that return each year

A business line of credit suits a gap whose size you may not be able to predict. You draw for the quiet month, repay through the busy one, and draw again next year without a fresh application.

The facility works and is priced much like an overdraft, so the choice comes down to which lenders will approve you, what they want as security, and how fast they move.

If the gap is one-off and you know its size, a working capital loan gives you a lump sum with fixed repayments and a clear end date. The deciding question is whether it happens again, as covered in this guide to choosing between a loan and a line of credit.

Business overdraft alternatives

Option Best for How you repay Main trade-off
Business overdraft Small, short-term gaps in day-to-day cash Deposits into the account Bank relationship expected, annual review, fee on the limit
Business line of credit Recurring gaps of varying size Draw, repay, redraw against a limit Ongoing access fee applies to the facility
Invoice finance Long customer payment terms Settled when the invoice is paid Higher effective cost, third party in your invoicing
Business credit card Timing gaps of a few weeks Cleared within the interest-free period High rates on any balance that rolls over
Trade finance Stock and supplier orders, especially imports At the end of an agreed window Documentation for every order
Asset finance Vehicles, machinery, fit-outs Fixed term matched to the asset Funds the asset only, secured against it
Working capital loan A one-off gap of known size Fixed instalments over a set term Interest on the full amount from day one

This guide to working capital finance covers each option in more detail, including what lenders want to see.

Five questions before you sign

Facilities that look identical on paper often aren’t. Ask these questions to find out where they differ:

  • What is every fee charged on, and what does this cost me in a month where I draw nothing?
  • How long until the money is in my account, and what could hold that up?
  • What security is required, upfront and later, and does that change above a certain amount?
  • When is the facility reviewed, and what would cause the limit to be reduced?
  • What happens if I repay early, and can I make extra repayments without a penalty?

Get the answers in writing. Verbal quotes may change between the phone call and the contract. Always check with your accountant if you’re unsure.

The nearest alternative to an overdraft

An overdraft limit can be cut at review, and a bank application can take weeks. Neither is a problem if you already have somewhere else to draw from.