What overdraft fees are for businesses and how they work

An overdraft fee is a fee you pay to your bank when you overdraw your account. Generally, when you make a transaction, such as a check, withdrawal, or debit card purchase, the cost of which exceeds the funds available in your account, your bank can approve the transaction and take over the cost, causing the your account balance is negative. Most banks will charge overdraft fees and require you to repay the overdraft amount within a specified period of time.

Because banks don’t automatically offer overdraft coverage, you’ll usually have to choose to activate the service when you open a business bank account. Also, not all banks allow you to overdraw your account; some will decline transactions if there are insufficient funds.

Overdraft Fee Example

Let’s say you need to distribute payroll soon and your employees’ salaries total $62,000. However, your business checking account has an available balance of only $60,000, and your customer hasn’t paid their most recent bill. Rather than force his employees to wait for their back pay, he withdraws $62,000 to distribute to his employees, leaving him with a negative balance. The bank charges you an overdraft fee for this transaction.

To continue the example above: If, later the same day, your automatic bill payment setup deducts $300 from your business checking account to pay for utilities, your bank will charge another overdraft fee for that particular transaction because banks They charge overdraft fees on a -transaction basis.

How is an overdraft fee charged?

If you opt for overdraft coverage, you will be charged an overdraft fee each time you make a transaction that requires your bank to deplete more funds than are available in your account balance. These transactions include swiping your debit card, withdrawing cash from an ATM, making an automatic payment, or having your customer cash in a written check.

Instead of allowing the bank to overdraw your account, you can opt for overdraft protection services. They pay for transactions using linked accounts or lending solutions, such as linked deposit accounts, lines of credit, or credit cards, rather than taking money from their provider.

How much does an overdraft cost?

Business overdraft fee costs vary from bank to bank, and traditional banks tend to charge $10 to $40 per overdraft transaction. To help you get a better idea of ​​your overdraft coverage costs, we’ve listed the fees charged by some of the best small business banks.

  1. To pursue: $34 per overdraft item starting with the first transaction that overdraws your account by $50.
  2. Bank of America: $10 per overdraft of more than $1.
  3. Axos Bank: $25 per overdraft item.
  4. US Bank: $36 per overdraft item if the transaction is over $5 and your available negative balance is over $50.
  5. Silicon Valley Bank: $30 per overdraft item.

It is important to know how your bank processes debit transactions to your account. If your bank settles the largest transaction first, you could receive more fees compared to a bank that processes the smallest transaction first.

Some banks charge an extended overdraft fee if your balance remains negative for a certain number of days. Most banks require you to pay off your negative balance within five to seven days before charging you an extended overdraft fee.

Banks with no overdraft fees

Many digital-only banking solutions have waived fees for business overdraft coverage. Here are some banks that do not charge overdraft fees:

  1. First Internet Bank: First Internet Bank, online only, waived overdraft fees for small business accounts in March 2022.
  2. Lilly*: The Lili BalanceUp feature covers overdraft Visa Business debit card transactions of up to $200 at no charge.
  3. Mercury*: This fintech solution does not charge overdraft fees.
  4. Santander Bank: This bank does not charge for transactions that overdraw your account by $100 or less.

*Providers are financial technology (fintech) platforms backed and FDIC insured by a supporting banking association (Choice Financial Group for Lili and Evolve Bank & Trust for Mercury).

Ways to avoid being charged overdraft fees

Business overdraft fees can easily add up and eat away at your earnings, so it’s important to learn how to avoid them.

  • Cancellation of Overdraft Coverage: The easiest way to avoid an overdraft fee is to opt out of the bank’s overdraft protection. Without overdraft protection, transactions are declined if your account does not have enough funds to cover them.
  • Sign up for online banking: Web and mobile banking platforms allow you to view your account balances anytime, anywhere. Keep track of your funds to avoid making transactions that cause your balance to go negative.
  • Track your financial transactions: Keep track of your checking and automatic payment transactions to ensure you have a sufficient balance in your account.
  • Sign up for balance alerts: Some banks allow you to set up mobile text or email alerts that notify you when your account falls below a certain threshold. With balance alerts, you’ll know when to deposit additional funds or postpone unnecessary transactions.
  • Put extra funds in your account: Create a buffer by making sure to deposit a certain amount of money that should always be in your account. If unexpected expenses require you to use these funds, replenish the amount as soon as possible.
  • Understand the bank’s overdraft policies: Knowing and understanding your bank’s overdraft policies is essential to help you save on overdraft fees later. Find out how your bank processes debit transactions in one day. If your bank processes the smallest transaction first, you’ll have less risk of being charged multiple overdraft fees if you have more than one debit transaction on the same day.

Bottom line

Overdraft coverage is useful for paying transactions in emergencies. However, relying on the service regularly means incurring unnecessary fees. If you don’t want the costs of business overdraft fees to add up and decrease your business income, monitor your account balance and transactions to avoid creating a negative balance in your account. You can also avoid overdraft fees by opting out of overdraft coverage or enrolling in overdraft protection.

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