01
The account history
How the account has behaved, particularly the low points and how often it has been at or near an existing limit. A bank providing the overdraft usually holds the transaction account, so it sees everything.
Revolving facility
A limit that lives on the account , not beside it.
An overdraft is a revolving limit attached to the trading account itself, so it is used without anyone deciding to use it. That is its convenience and its main danger in one sentence.
Last reviewed 8 September 2026
Indicative interest cost
Weekly
$94/week
$408 /month $4,900 a year while drawn
$80,000
$5,000 $500,000
$35,000
Nothing drawn Fully drawn
14.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $80,000 scenario
$35,000 drawn at 14.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
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The short version
Five lines that separate it from a line of credit.
- It is on the account. No drawdown request and no separate balance. The account simply goes below zero and the overdraft is in use.
- Repayment happens automatically. Every deposit reduces the balance, so an account in credit for part of the month is repaying without anyone deciding to.
- Interest accrues daily on the balance. Which makes it cheap when used briefly and expensive when the account never returns to credit.
- Convenience is the risk. Because using it requires no decision, an overdraft can become permanent without anyone noticing it happened.
- Indicative only. Every figure here is illustrative. Actual limits, rates and fees come from the bank after assessment.
The mechanism
Why it feels different from every other facility.
Every other facility on this site requires an act. A drawdown is requested, funds move, a balance appears. An overdraft requires nothing: the wages go out, the balance passes zero, and the business is borrowing.
Repayment is equally automatic. A customer payment landing on Thursday reduces the overdrawn balance the moment it clears, and interest for Friday is calculated on the lower figure. An account swinging between credit and debit through the month is repaying and redrawing continuously.
That is genuinely efficient, and it is the reason overdrafts remain popular despite generally costing more than a secured term facility. It is also why the balance can drift downward across a year without any single decision that could be pointed to, which is the risk the rest of this page keeps returning to.
To draw
Spend past zero
To repay
Receive a payment
Decisions required
None
Visibility
The account balance
Worked example
An $80,000 limit used two different ways.
A services business holds an $80,000 overdraft at an indicative 14%. In the first year the account swings between $20,000 in credit and $50,000 overdrawn, averaging around $18,000 overdrawn. Interest for the year is roughly $2,500, plus a line fee of around $400.
In the second year trading softens slightly. The account no longer returns to credit and the balance sits between $45,000 and $70,000, averaging around $58,000. Interest is roughly $8,100 on the same facility at the same rate.
Nothing about the arrangement changed. The cost more than tripled because the usage pattern changed, and the change happened gradually enough that no month felt different from the one before it. That is the characteristic failure mode of the instrument, and the only defence is watching the pattern rather than the balance.
Illustrative figures
- Limit
- $80,000
- Year one average drawn
- ~$18,000
- Year one interest
- ~$2,500
- Year two average drawn
- ~$58,000
- Year two interest
- ~$8,100
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
Against a line of credit
Two names for one mechanism, and where they differ.
The underlying arithmetic is identical. What differs is where the limit sits, who provides it and how it behaves in use.
| Feature | Business overdraft | Business line of credit |
|---|---|---|
| Where the limit sits | On the trading account | Beside it, drawn deliberately |
| Drawing | Automatic, by spending | A deliberate transfer |
| Repaying | Automatic, by receiving | A deliberate transfer |
| Ordinarily provided by | The business’s own bank | A bank or a non-bank lender |
| Visibility of usage | Blended into the account | A separate balance |
| Ease of drifting into permanent use | High | Lower |
The last row is the real distinction and it is behavioural rather than contractual. A separate balance that has to be actively drawn is harder to slip into than an account that simply continues past zero.
How a bank sets the limit
Four things that decide the number.
A general description rather than any bank’s criteria, which are their own and vary considerably.
02
The cash cycle described
How long the business waits between paying and being paid. A limit justified by a described cycle is easier to size and easier to defend at review than one justified by a preference.
03
Security offered
Property security ordinarily produces a larger limit at a lower rate. A general security agreement over the business is the common minimum, and unsecured limits are smaller.
04
The relationship
Length of banking history, other facilities held and conduct on them. This matters more on overdrafts than on most facilities because it is ordinarily the incumbent bank making the decision.
The core-debt problem
An overdraft that never clears is term debt on an overdraft rate.
Banks call the part of an overdraft that never comes back down core debt, and they watch for it. Where a facility has a hard floor it never rises above, that portion is permanent borrowing being carried at revolving pricing, which is more expensive than a term loan for the same money and weaker at review. The ordinary remedy is to term out the core, converting the permanent portion into a scheduled facility at a lower rate and leaving the overdraft for genuine fluctuation. That is a conversation a bank will usually welcome, because it improves its position too.
The trade
What it gives and what it costs.
What it gives
- Funding that requires no decision at the moment it is needed
- Automatic repayment from every deposit that lands
- Interest only on the daily balance, so brief use is genuinely cheap
- A single account to watch rather than a facility and an account
- Availability from the bank that already holds the relationship
What it costs
- A rate ordinarily above secured term lending for the same borrower
- A line fee on the whole limit whether or not it is used
- Usage that is blended into the account and therefore easy to miss
- A limit that can be reduced or withdrawn on review
- A strong tendency to become permanent without any decision being made
Keeping it healthy
Three habits that keep an overdraft working.
01
Watch the lowest point, not the balance
The most useful number is the least overdrawn the account got in each month. Rising over several months is the earliest signal that core debt is forming, and it appears long before any month feels difficult.
02
Keep some headroom for the unexpected
An account routinely running within a few thousand dollars of its limit has no capacity for a surprise, and a dishonoured payment is both a fee and a signal to the bank. Treating the last portion of the limit as unavailable is a discipline rather than waste.
03
Raise a limit change before it is needed
A request to increase a limit made from a comfortable position is a different conversation from one made from an excess. Banks read the timing, and the version made in advance ordinarily gets a better answer.
When it goes wrong
Three situations overdraft holders should recognise.
The limit is reduced at review
A bank concerned about a hardening balance can reduce the limit, and the reduction has to be accommodated out of a position that was already tight.
What happens:A funding gap created by the review rather than by trading, arriving with little notice.
The account is exceeded
An automatic payment takes the balance past the limit. An excess fee applies and payments may be dishonoured, which affects the parties expecting them as well as the bank’s view.
What happens:A small direct cost and a disproportionate signal, both avoidable by monitoring headroom.
Core debt hardens
The floor of the balance rises year on year until the facility is permanently drawn and the flexibility it was taken for no longer exists.
What happens:Permanent debt at revolving pricing, and no capacity left for the fluctuation the overdraft was meant to absorb.
All three are visible in the account before they become problems. The lowest monthly balance, plotted across two years, shows every one of them developing.
The honest limit
Where an overdraft is the wrong instrument.
It is the wrong instrument for anything permanent. An asset held for years, a fitout, an acquisition or any spend that does not convert back to cash inside a normal trading cycle should be funded on a facility with a term, because the overdraft rate is priced for temporary use and the absence of a schedule means nothing forces the balance down.
It is also the wrong instrument where the underlying problem is margin rather than timing. The convenience that makes an overdraft useful is exactly what allows an unprofitable position to be funded quietly for a year, and the balance is the only place it shows.
Where it is right, which is genuine fluctuation around a viable business, it is efficient and hard to beat. The distinction is whether the account comes back, and that is answerable from the statements in five minutes.
The relationship
Why an overdraft is a bank product in a way a line is not.
An overdraft sits on the transaction account, which means the provider is ordinarily the bank that already holds that account. That has consequences beyond convenience: the bank sees every receipt and every payment, it knows the business better than any outside lender could, and the facility is one part of a relationship that includes the account, the merchant facility and frequently a mortgage.
That works in the business’s favour more often than not. A bank with years of account history can size a limit with more confidence than a lender working from three months of statements, and it can move faster when a limit needs adjusting because it is not assessing from scratch.
It also concentrates the position. A business whose transaction account, overdraft, term debt and property security all sit with one institution has very little room to move if that institution changes its appetite, and the alternative providers it might approach are starting without the history the incumbent has. Holding one facility elsewhere, even a modest one, is worth something for exactly that reason.
A practical note
Two accounts are easier to read than one.
Because an overdraft blends borrowing into the trading account, the single most useful administrative change a business can make is to separate the flows it can. Keeping tax collected in a second account, and keeping any longer-term reserve out of the overdrawn account entirely, makes the true operating position visible rather than netted against the facility.
The alternative is an account balance that answers no question cleanly. A figure of negative $40,000 might be a business that is short, or one that is holding $30,000 of GST it has not yet paid, and the two are entirely different positions carrying the same number.
Separating them costs nothing beyond opening an account, and it turns the overdraft balance into a measurement of the trading position rather than a mixture of that and everything else.
The cost while overdrawn
What an average overdrawn balance costs.
Interest accrues daily on the balance, so this shows the cost of an average overdrawn position rather than a repayment. The line fee sits on top of it. Indicative only, and not a quote or offer of credit.
Indicative interest cost
Weekly
$94/week
$408 /month $4,900 a year while drawn
$80,000
$5,000 $500,000
$35,000
Nothing drawn Fully drawn
14.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $80,000 scenario
$35,000 drawn at 14.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Sources
- Reserve Bank of New Zealand, statistics
Context for New Zealand business lending rates and why indicative bands move.
- Commerce Commission
The regulator whose guidance covers lender conduct and fee disclosure.
- Personal Property Securities Register
Backs the description of the general security interest an overdraft ordinarily involves.
- Companies Office
The register used to confirm entity and director details during assessment.
- Financial Markets Authority, financial advice
Backs the distinction between general information of this kind and regulated financial advice.
FAQ
Business overdraft in New Zealand, questions answered
What is a business overdraft?
A revolving limit attached to the trading account, allowing the balance to go below zero up to an agreed amount. Interest is charged on the daily overdrawn balance and every deposit reduces it automatically.
How is it different from a line of credit?
Mechanically it is the same instrument. What differs is that the limit sits on the transaction account, so drawing and repaying happen automatically through ordinary trading rather than through deliberate transfers.
What does an overdraft cost?
Interest on the daily overdrawn balance plus a line fee on the whole limit whether or not it is used, with establishment and review charges on top. A facility used briefly is cheap; one permanently drawn is expensive.
What is core debt?
The portion of an overdraft that never comes back down. Banks watch for it because it is permanent borrowing being carried at revolving pricing, and the usual remedy is to convert that portion into a term facility at a lower rate.
Can the bank reduce the limit?
Yes, on the terms in the agreement, and it is most likely to do so when the business’s position has weakened. That is worth understanding before an overdraft is treated as permanent capital.
What happens if the limit is exceeded?
An excess fee ordinarily applies and payments may be dishonoured. The direct cost is small and the signal to the bank is out of proportion to it, which is why watching headroom rather than the balance matters.
Is an overdraft secured?
It varies. A general security agreement over the business is the common minimum, and larger or cheaper limits are frequently secured over property. A personal guarantee is common where no property security is taken.
How large a limit is reasonable?
Enough to cover the ordinary fluctuation of the cash cycle with headroom for a surprise, and no more. A limit larger than the business will ever use is charging a line fee for nothing, and a limit that is routinely nearly full is too small.
Should an overdraft return to credit?
At some point in a normal cycle, ideally. An account that swings between credit and debit is behaving exactly as intended. One that has not been in credit for a year is carrying core debt whether or not anyone has called it that.
Can an overdraft be used to buy equipment?
It can and it ordinarily should not. An asset held for years financed on an overdraft means permanent drawing at revolving pricing, where asset lending secured on the equipment itself will generally cost less and comes with a schedule that clears it.
How often is it reviewed?
Ordinarily annually, on the terms set out in the agreement. The review looks at the trading position and the usage pattern, and an account that has cleared periodically reviews considerably better than one sitting at its limit.
Is this page financial advice?
No. It describes how a facility works in general terms. This site is not a lender, a broker or a registered financial adviser, and whether an overdraft suits a particular business depends on facts a website cannot see.
Related
Related reading
Business line of credit
The same mechanism, held beside the account rather than on it.
Read onAgainst a line of credit
The comparison, examined properly.
Read onManaging irregular income
The pattern an overdraft absorbs best.
Read onWhat lenders assess
How a limit is set, and what a review looks at.
Read onAll eight facilities
Every revolving arrangement compared in the same shape.
Read on