# Business overdraft — what it is and when tradies should use one > A business overdraft is on-demand credit on your trade account for short-term timing gaps. Here is how it works and the trap to avoid. Source: https://tradiefinance.co.nz/glossary/business-overdraft Published: 2026-05-15T08:00:00.000Z Category: cashflow Tags: glossary, cashflow Image: https://tradiefinance.co.nz/images/resources/generated/tradie/glossary/business-overdraft-primary.jpg Image alt: Invoices, materials and a tablet representing Business overdraft — what it is and when tradies should use one --- A business overdraft is the bit of money the bank lets you spend after your account hits zero. It is built for the gap between a bill landing and an invoice getting paid — not for buying a ute, and not for living in. ## What it is A **business overdraft** is a revolving credit limit attached to your everyday business bank account. The bank agrees a limit — say $20,000 — and lets the balance drop below zero up to that amount whenever you need it. The key word is revolving. Unlike a [term loan](/glossary/term-loan) where you draw a fixed lump sum and pay it down on a fixed schedule, an overdraft tops up and pays itself off automatically as money flows in and out of the account. A client pays an invoice, the balance climbs back toward zero. You pay a supplier, it dips again. You only pay interest on the part you have actually drawn, day by day — not on the whole limit. That on-demand nature is the whole point. The credit sits there ready and you do not reapply each time. Most overdrafts charge interest on the drawn balance plus a small line fee for keeping the limit open. Pricing is typically higher than secured asset finance, because the overdraft is usually unsecured — the exact rate and fees depend on your bank and your trading history. ## How it works and when it matters for tradies Overdrafts earn their keep on timing gaps. The classic tradie squeeze: you have laid out cash for materials, paid the lads on the 20th, and your big progress claim is still sitting on a 30-day payment term. The work is done and the money is coming — it is just not here yet. An overdraft bridges that gap so wages and the GST bill get paid on time, then clears itself when the invoice lands. Say a chippie finishes a $35,000 fit-out, pays $9,000 for materials and a $6,000 wage run before the client settles. A $20,000 overdraft covers that $15,000 hole for the three weeks until the invoice clears, costing interest only on the $15,000 actually drawn, for the days it sat there. That is healthy [working capital](/glossary/working-capital) management. Now the warning we give every tradie: do not live in your overdraft. If your account never climbs back above zero — if the balance just sits parked near the limit month after month — the overdraft has stopped being a timing tool and quietly become permanent debt at a revolving rate. That is a sign the business is structurally short of cash, not just waiting on one invoice. We see it every week: it is one of the most common ways a busy trade business slowly bleeds out without noticing. A simple gut check: over a normal month, does the account swing back toward zero (or into the black) at least once? If yes, the overdraft is doing its job. If it never recovers, the real fix is usually elsewhere — chasing payment terms, [invoice finance](/glossary/invoice-finance) to get paid faster, or restructuring debt — not a bigger limit. One honest note: overdrafts are repayable on demand, so the bank can in theory pull the limit — do not treat it as guaranteed long-term funding. In our experience, used for genuine short-term gaps it is one of the handiest tools a tradie has; used as a permanent crutch, it is an expensive one. ## See also - [Working capital](/glossary/working-capital) - [Invoice finance](/glossary/invoice-finance) - [Asset finance vs bank overdraft — which suits the job](/guides/asset-finance-vs-bank-overdraft) Not sure whether an overdraft, invoice finance or something else fits your cashflow? [Book a call](/book-a-call) and talk it through with a real broker — no pressure, just a straight answer.