Business Banking | How Can I Avoid Business Overdraft Fees?

A business overdraft fee is a charge your company incurs when spending exceeds the available balance in your business overdraft account or standard checking account. The costs vary from $10 to over $30 per transaction. 

Bank overdraft fees are more prevalent than people realize, so even the most conscientious business owners may encounter these unsolicited charges from time to time. Banks collect approximately $11 billion every year in overdraft fees, according to a Center for Responsible Lending publication released earlier this year.

However, your business may not be able to absorb these extra costs, especially if your profit margins are thin. Let’s explore these charges further and look at how to avoid business overdrafts, especially if you’re a small business operating on tight margins.

Types of Business Overdraft Fees

There are four different types of overdraft fees that banks can charge to your business:

• Non-sufficient funds fee (NSF)—If a recurring payment posts to your account or you try making a purchase without the funds to cover it, the bank can reject the payment. When this happens, the funds will not come out of your account to make the payment; however, the bank will charge an NSF fee for the attempted transaction. 

• Overdraft fee — Conversely, the bank could approve the payment even though the funds are absent. The money is pulled from your account, putting it in the red, and the bank will then charge your account an overdraft fee.

• Extended overdraft fee — Banks expect you to promptly rectify the situation by making a deposit to get your balance back in the black. If you fail to do this for a time (often five days), your bank will charge extended overdraft fees to penalize you for leaving your account overdrawn.
• Overdraft protection fee — Banks offer a service called “overdraft protection,” which transfers money from another account to the checking account to make up shortages. Although these fees are lower than other business overdraft rates, banks still charge you each time a transfer occurs.

More About Overdraft Protection

The Board of Governors of the Federal Reserve System approved a rule mandating that banks obtain your permission to provide overdraft protection. Before 2010, many financial institutions enrolled users in overdraft facilities for small business and personal accounts by default, often without clear disclosure.

Today, opt-in requirements say you must proactively accept overdraft protection before your bank pays your overdrafts.

When your business accepts overdraft protection, your financial institution covers your bounced check or debit card payment and charges you a fee for this service, usually around $35. Banks use these fees as a revenue source, and they can swiftly accumulate if you are not on top of your finances.

The worst part is your account might be charged a fee every day your balance is negative. Furthermore, fees are not monitored or uniform, making it challenging to predict when charges will be assessed. 

Continue reading: What is overdraft protection?

Techniques to Avoid Business Overdraft Fees

You can avoid most overdraft fees your business pays. Here are some techniques to use.

• Utilize accounting software — Overdrafts often occur due to automatic withdrawals or forgotten debit card purchases that were not immediately reconciled. Use accounting software to track these withdrawals before they come out of your account and to adjust your spending accordingly.

• Monitor your balance — Leverage online banking options and mobile apps to check your business account balance regularly. You may customize notifications that will alert you if your balance falls below a predetermined threshold.
• Read the fine print — The overdraft fee structures vary from bank to bank. When setting up your business accounts, scrutinize your bank’s overdraft policy and associated fees, so you are not blindsided with surprise charges.
• Apply for an overdraft line of credit — You may be able to link a line of credit to your checking account that would kick in to cover overdrafts. Interest, known as business overdraft interest rates, begins accruing immediately once the line of credit is used and continues until the balance is repaid.
  The interest charges quickly add up; however, they are more affordable than other overdraft fees.

Keep in mind that financial institutions often fail to advertise or proactively offer less expensive options like overdraft protection or overdraft lines of credit. Moreover, a credit line may not be an option for businesses that need help the most — fledgling companies with poor or meager credit histories. These small businesses with overdraft issues are often the hardest hit, lacking access to more flexible or transparent business overdraft options.

Read More: Are Overdraft Fees Tax Deductible for a Business?