Business Overdraft
The most convenient credit a business will ever hold — and the only one the bank can take back this afternoon.
// 01 — THE PROBLEM IT SOLVES
Every trading business has timing noise: wages fall due Thursday, the biggest debtor pays Monday; the GST payment and the slow invoice land in the same week. These gaps are small, brief, and not quite predictable — too trivial for a facility drawdown, too real to ignore. The overdraft exists for exactly this: a limit on the trading account itself, no drawdown mechanics, no notice period. The account simply runs below zero for a few days and climbs back out when the receipts land.
The essence of the product is convenience priced by the day — and its legal skeleton is the price of that convenience: repayable on demand. The bank can require repayment, or stop honouring payments, whenever its view of the business changes. Everything a desk thinks about overdrafts, and everything a borrower should, follows from holding those two features in the same hand: the easiest money to use is also the least dependable money to build on.
// 02 — ANATOMY
There is deliberately little of it. A limit — modest by design, set against the size of the timing noise rather than the trading cycle. Daily interest on the overdrawn balance, at the top of the business's borrowing stack, sometimes with a small fee for the line itself. On-demand repayment, reviewed annually in the ordinary course. Security commonly a general security agreement and guarantees, taken once across the banking relationship rather than for the overdraft alone.
What is absent tells the story: no commitment fee, because in substance nothing is committed; no drawdown conditions, because the account is the mechanism; no clean-down covenant, because the product is supposed to clean itself down every few days as receipts arrive. When it stops doing that, the anatomy has not failed — the use has changed, and that is a different section.
// 03 — WHAT IT REALLY COSTS
The rate looks alarming and the dollars often are not — in the right use. A constructed illustration, every figure invented for teaching:
≈ 120 days a year × NZ$100k × 11% × 120/365 ≈ NZ$3,600 a year
The same NZ$100,000 held overdrawn all year = NZ$11,000
— on money the bank may demand back at any time
Ten days a month of genuine timing cover costs less than most facilities' standing fees, which is why the overdraft earns its place in almost every banking package. The same balance held permanently is the most expensive core debt available — and the cost is the smaller half of the problem, because permanence on an on-demand product means the business's foundation can be called away precisely when a nervous bank is most inclined to call it. Cheap for noise, ruinous for structure: the arithmetic and the risk point the same direction.
// 04 — HOW THE DESK READS IT
A desk reads an overdraft the way a doctor reads a pulse — not for its size but for its shape. The healthy trace oscillates: below zero for days, back into credit as receipts land, touching both sides of zero every month. The account statement is the most honest document in the file, because it records what actually happened to cash, daily, unedited.
Hardcore is the word for the unhealthy trace — the portion of the overdraft that never repays, the floor under the oscillation. A limit of NZ$150k that has not seen the right side of NZ$60k in a year is really a NZ$60k core debt with a NZ$90k overdraft on top, and the desk prices, structures, and worries about the two parts differently. Hardcore is the overdraft's version of the revolver's failed clean-down: the same lie-detector, reading the same lie — permanent need wearing a short-term product.
And the emergency increase is a signal, not a transaction. A business that rings for a temporary limit increase before wages is having a liquidity event in miniature. Granting it may well be right; recording it and watching for the second one is not optional, because two temporary increases that never reversed are how hardcore is born — and how the desk learns, later than it should have, that the cycle lengthened months ago.
// 05 — WHERE IT GOES WRONG
The business built on callable money. Core working capital run on the overdraft for years because it was already there and asking for a facility felt formal. It works until the first genuinely bad month, when the business discovers that its foundation was a product designed to be withdrawn — the failure arrives at the worst moment by construction, because demand follows deterioration.
The creeping limit. Temporary increases granted in a hurry — before wages, before the season, after a big debtor slipped — that quietly become the new normal. Each one was small and reasonable; the sum is a facility-sized exposure with overdraft-grade monitoring and nobody having made the actual credit decision.
The rate-only comparison. “The overdraft is expensive, the term loan is cheap, so term the balance out.” Sometimes right — but if the balance is cyclical, the term loan removes the flexibility the business actually needed, and if it is hardcore from losses, terming it out finances the losses without asking why they are occurring. Product answers are downstream of the diagnosis, never a substitute for it.
// 06 — WORKED ON THIS SITE
The overdraft's graduation product — what the oscillation moves onto when it becomes a real trading cycle — is the revolving credit facility, and the two files read best together. Sizing the real need runs on the cash conversion cycle; what persistent overdraft reliance tells the bank reading your file is on How Banks Read You; and the working vocabulary is in the glossary.
// QUESTIONS PEOPLE ASK
- What is a business overdraft?
- A limit attached to the trading account that lets the balance run below zero, with interest charged daily on whatever is overdrawn. It exists for timing noise — wages due Thursday, the big debtor paying Monday — and it is the most convenient credit a business will ever hold: no drawdown request, no notice period, just spend. Its defining legal feature travels with the convenience: an overdraft is repayable on demand, meaning the bank can require repayment, or decline to honour further payments, at any time. That is not small print; it is the product.
- What is the difference between an overdraft and a revolving credit facility?
- Dependability, scale, and formality. A committed revolving facility is documented, runs for a fixed term, and obliges the bank to fund within the limit while no default exists; an overdraft is informal, uncommitted in substance, and callable on demand. Overdrafts suit small, brief, unpredictable gaps; a revolving facility suits the larger rhythmic swings of a real trading cycle. The practical test is what the money is doing: covering days of timing noise belongs on the overdraft, funding weeks-to-months of stock and debtors belongs on a facility a bank has actually committed to.
- Why can a bank cancel an overdraft without warning?
- Because on-demand repayment is the term on which the credit was granted — it is what makes a bank comfortable providing an unarranged-feeling, always-available limit with light documentation. The consequence borrowers under-price is timing: demand tends to arrive when the bank's view of the business has deteriorated, which is usually when the business can least replace the funding. A business whose core working capital lives on an overdraft is carrying a funding source that can vanish at its weakest moment — the cheapness of the product is partly the price of that risk sitting with the borrower.
- How is overdraft interest calculated?
- Daily, on the closing overdrawn balance, at a rate that is typically the highest in a business's borrowing stack — often meaningfully above term and facility rates — sometimes with a small line or facility fee for the limit itself. The arithmetic that matters is rate times balance times days: a high rate on a small balance for a few days is cheap in dollars, which is exactly the use case the product is built for. The same rate on a persistent balance compounds into the most expensive core debt a business can carry, which is the signal to move the borrowing somewhere structured.
- When should a business move from an overdraft to a proper facility?
- When the overdraft stops touching zero. An overdraft doing its job oscillates — into the red for days, back into credit as receipts land. One that sits permanently overdrawn has quietly become core debt: the business is funding stock and debtors, or absorbing losses, on the most expensive and least dependable money available. The move is not an admission of trouble — it is usually a sign of growth: the working capital need became real and permanent enough to deserve a committed structure, sized from the cash conversion cycle rather than from wherever the overdraft limit happened to be.
// SIZE THE REAL NEED
Whether a balance is timing noise or a real working capital need is arithmetic, not opinion. The Three Diagnostics calculator runs that reading against twelve numbers you enter yourself — and returns a senior banker's written read, not a score.
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