What exactly is overdraft protection? Essentially, this is a line of credit that banks offer to cover a customer’s overdrafts. It initiates when a customer uses their debit card or withdraws money from an ATM for more than the amount that’s in their account. Overdraft protection is typically used as a cushion for checking accounts, but it can also be applied to savings accounts.
Here’s an example. Let’s say you need to pay $500 for a software upgrade for your business, but you only have $350 in your account. Paying for that software will overdraft your account and initiate your overdraft protection, extending you a temporary line of credit. That line of credit will increase your account balance, allowing you to pay the bill without incurring the $35 in overdraft fees and a negative balance in your account.
Sounds great, right?
Well, when it comes to small business banking, overdraft protection is a controversial issue. Since 2010, policymakers have made it mandatory that banks allow the customer to opt into overdraft protection, instead of automatically enrolling your business and requiring you to opt out. Even though you aren’t incurring that $35 overdraft fee per transaction, banks still charge a separate fee for overdraft protection. This fee averages between $250 and $5,000. And depending on the bank, the customer may be charged a one-time fee every month they go into overdraft, as well as a daily or per transaction fee. As you can see, unless your business frequently overdrafts your account, sometimes total fees paid may be higher with this protection than without.
Benefits and Risks of Overdraft Protection
Obviously, overdraft protection can eliminate embarrassment when a transaction is declined or returned. It can also allow your transaction to be completed, even though it results in a fee. And it will allow your business to have cash available for emergencies, such as paying vendors or an unexpected business expense.
However, even with these benefits, opting into overdraft protection can create some risks. Fees can add up, making it a very expensive transaction and ultimately putting your business into greater debt. The protection can also be addicting and encourage overspending, because there will always seem to be a cushion in your account.
Overdraft Protection Solutions
Most banks offer a few different types of overdraft protection. An overdraft line of credit is a solution that links your business checking account to your business credit line. Funds are automatically transferred from your overdraft line of credit to cover your ATM withdrawal, debit purchases, checks, and online bill payments when you don’t have the available balance in your checking account.
Savings overdraft transfer is a solution that is linked to your business savings account. Funds are automatically transferred from your savings account to your checking account to cover ATM withdrawals, debit card purchases, checks, and online bill payments when you don’t have the necessary available balance in your checking account.
Best Banks for Small Business Owners Who Want Overdraft Protection
Below is a brief list of small business banks that make it easier to avoid overdraft fees.
Capital One 360
Best for: Line of credit
Capital One allows you to sign up for the line of credit and pay just the interest on the amount that you use. Interest rates depend on a variety of factors, such as salary, etc. There is no sign-up fee. This is unique, as most banks have you pay a fixed fee on the overdrawn amount. Capital One is free from transfer fees if you link up with a savings account from Capital One.
Best for: Friendlier overdraft protection
Discover will allow you to connect a bank account or savings account to your checking account. If you’re about to go negative, they will automatically transfer funds to your checking account with no charge.
Best for: Low fees
Chase allows you to link a savings account as overdraft protection backup. Chase’s business overdraft protection will pay for all transactions, as long as the funds in your savings account can cover it. There is no fee for an overdraft protection transfer, but there is a $5 withdrawal limit fee once you hit six withdrawals per monthly statement period.
Best for: Line of credit
EverBank will charge you interest only on the amount you used to overdraft. Again, the interest rate depends on many factors, such as how much you make, etc. Although there is no fee to sign up, if you’re unable to pay the interest that you owe, you will incur a $25 late payment fee. You can also opt into an overdraft protection transfer service by linking a savings account or line of credit.
Best for: Multiple options
Citizens Bank gives you two methods of overdraft protection. The first would be a line of credit up to $10,000 with two payment options: either 2 percent of the current balance or $20 (whichever is greater). There is a $30 annual fee, a $12 transfer fee per day for each transfer and interest on outstanding balances. The second overdraft protection method is to link your business checking account to your business savings account. Citizens Bank charges a $12 transfer fee per day for each transfer.
Best for: Low fees
TD Bank business overdraft protection allows you to link your business checking account to a business savings or money market account. Money is automatically transferred to your checking account up to your available balance when needed. There is a $10 per day transfer fee, which is lower than most banks.
Choosing the right small business bank requires a lot of research to ensure it’s best bank for your needs. Many banks offer overdraft protection, but some offer better solutions than others depending on your specific situation.
Don’t think overdraft protection is for you? Research options to understand banks’ overdraft fee structures, because those fees can add up too. Take the time to consult with each bank so you fully understand their policies. This will help eliminate any surprising fees and unexpected debts.
Does your small business bank offer a helpful overdraft policy? Share with us on Twitter @Revenued_com.
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