Home » Avoid Running Out of Cash » Analyze and Understand Your Overdraft Charges

Minimize Your Overdraft Charges to Reduce
Costs and Maximize Profitability

In an ideal world, your business would never run out of cash. You would have a robust, focused business budget, pay all your bills on time and perfectly manage your cash flow. Unfortunately, the real world is far from ideal. Your bills are due right now, customers are taking too long to pay invoices and you need to stay afloat. It’s times like these that you might consider using your business bank account’s overdraft capabilities.

However, when it comes to “going into the red,” it’s vital to understand and manage your overdraft and other bank charges to minimize what you’ll pay in fees. Here’s our guide to doing just that.

Understand That an Overdraft Is Just
a Short-Term Solution

Business overdrafts are convenient, but they can be very costly. If you’re having to use your overdraft capability frequently, it could be a sign of other systemic issues in your business. Make sure you analyze your pricing and expenses to maximize your profit margins.

Take steps now to reduce how much cash you’re losing and develop a healthier cash flow. Overdrafts should really be for emergencies only — if you need to free up cash, a business loan or credit card could be a better solution.

Think About How Much You’re Losing
to Overdraft Charges

Overdraft fees can be extremely painful. Banks typically charge “per item,” which means that any transaction taking your account into a negative balance incurs a separate fee. This is clearly unsustainable, as these fees put you further in debt — meaning you have to earn that much more to get your account up to a positive balance.

Here are some typical overdraft fees for comparison:

Bank

Per Item Fee Amount

Maximum number
of fees per day

Maximum total
fees per day

Bank of America

$35

4

$140

Chase

$34

3

$102

Citibank

$34

4

$136

Fifth Third Bank

$37

5

$185

PNC Bank

$36

4

$144

TD Bank

$35

5

$175

Wells Fargo

$35

4

$140

How Much Could Overdraft Fees End up Costing You?

Let’s explore what happens if you don’t manage your finances properly and have to go into debt every month. We’ll assume the following:

  • Your business takes in $17,000 a month
  • Of that $17,000, about $8,000 of your revenue comes in late each month
  • You have $15,000 of expenses each month
  • When your bank balance is in the negative, you still have to pay 10 bills a month

This is how that looks in practice:

Month 1
  • Starting balance: $0
  • Revenue received before expenses: $9,000
  • Expenses: $15,000
  • Balance before overdraft charges: -$6,000
  • Overdraft charges at $35 each on 10 items: -$350
  • Balance after overdraft charges: -$6,350
  • Remaining revenue comes in: $8,000
  • New balance: $1,650
Month 2
  • Starting balance: $1,650
  • Revenue received before expenses: $9,000
  • Expenses: $15,000
  • Balance before overdraft charges: -$4,350
  • Overdraft charges at $35 each on 10 items: -$350
  • Balance after overdraft charges: -$4,700
  • Remaining revenue comes in: $8,000
  • New balance: $3,300
Month 3
  • Starting balance: $3,300
  • Revenue received before expenses: $9,000
  • Expenses: $15,000
  • Balance before overdraft charges: -$2,700
  • Overdraft charges at $35 each on 10 items: -$350
  • Balance after overdraft charges: -$3,050
  • Remaining revenue comes in: $8,000
  • New balance: $4,950
Month 4
  • Starting balance: $4,950
  • Revenue received before expenses: $9,000
  • Expenses: $15,000
  • Balance before overdraft charges: -$1,050
  • Overdraft charges at $35 each on 10 items: -$350
  • Balance after overdraft charges: -$1,400
  • Remaining revenue comes in: $8,000
  • New balance: $6,600
Month 5
  • Starting balance: $6,600
  • Revenue received before expenses: $9,000
  • Expenses: $15,000
  • Balance before overdraft charges: $500
  • Overdraft charges at $35 each on 10 items: None
  • Balance after overdraft charges: $500
  • Remaining revenue comes in: $8,000
  • New balance: $8,500

As you can see, even if your business reliably takes in more than it spends, timing can be very costly. In this example, it takes five months to get a stable cash flow. In that time, you will pay out $1,400 in overdraft charges — nearly 2 percent of your gross revenue and 14 percent of your net profit. Ouch!

Types of Overdraft Fees

There are several different types of overdraft fees, which include:

  • A “per item” fee as mentioned above. These typically range from $30-$40 per overdraft instance.
  • A “non-sufficient funds” fee, which for all intents and purposes is the same as a “per item” fee. Banks can charge a per item fee or a non-sufficient funds fee, but not both.
  • An overdraft protection fee, which is charged when a bank arranges an internal transfer from one of your accounts to another to avoid other overdraft fees. These are normally around $10-$15 per transfer.
  • An extended or sustained overdraft fee, which is charged if your account is overdrawn for too many days. These fees may be charged once, or can be charged for every day you remain overdrawn.

How to Avoid Overdraft Charges

The simplest way to avoid overdraft charges is not to go overdrawn in the first place. But unfortunately, that’s easier said than done! Here are some practical things you can do to reduce your chance of running out of money:

Build Up a Cash Buffer in Your Business

Plan to have at least two to three months of operating expenses in your bank account at any time to cover regular payments and unexpected events.

Maximize your Profit Margins

Understand all the costs that go into the products and services you sell. Read our guide to calculating and maximizing your profit margin.

Manage Your Cash Flow More Effectively

Stay on top of your accounts payable and receivable, and forecast and optimize your cash flow.

Pay Your Bills on Time

Don’t be tempted to delay bill payments, and always pay within the terms allowed. Not paying your bills on time can incur extra charges from suppliers and damage your relationship with them.

Consider Other Financing

Overdrafts are not the only option when it comes to financing your business. A loan or business credit card can provide extra flexibility, although you should be aware of interest charges and repayment terms.

Banks With Low Overdraft Fees

Some banks have low or non-existent overdraft fees. These include:

Bank5 Connect: $15 Fee

Capitol One 360: Opt into a line of credit and only pay interest on the overdrawn amount

Remember that regularly going overdrawn is normally a sign of deeper issues with your business. Rather than relying on overdrafts, focus instead on maximizing your profits and building a cash buffer — and consider other financing options as good alternatives.

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