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Working capital needs come in two shapes, and matching the facility to the shape is most of the decision.
Side by side
| Business overdraft | Second mortgage | |
|---|---|---|
| Structure | Revolving limit on the transaction account | Lump sum, fixed term |
| Typical size | Tens to low hundreds of thousands | $50,000 into the millions |
| Assessed on | Financials, serviceability, conduct | Property equity, exit, business purpose |
| Time to approve | Weeks to months | One to three weeks |
| Cost | Bank margin on drawn funds, plus a line fee | Indicatively from 0.975% a month plus a fee around 2% |
| Pay interest on | What is drawn, daily | The full amount, for the term |
| Review | Annual, repayable on demand | Fixed until the term ends |
| Tax debt or weak financials | Usually declined | Often workable |
When the overdraft is right
The business is profitable, its books are current, and the need is the normal gap between paying suppliers and being paid. The balance swings in and out of credit. An overdraft costs little when unused and is there when needed. Its weaknesses are that banks can reduce or withdraw it at review, it is repayable on demand, and the limit is set by serviceability, so it is rarely large.
When the second mortgage is right
The need is a single larger amount for a defined purpose: clearing an ATO debt, buying out a partner, funding a contract’s mobilisation costs, taking a bulk stock opportunity, paying a deposit. The business owns property with equity. And either time is short, or the financials would not yet satisfy a bank. The cost per dollar is higher, but the funds are certain for the term and the approval does not hinge on last year’s tax return.
Using them together
A common and sensible sequence: a second mortgage clears the tax debt and the creditor backlog that was blocking bank credit. With lodgements current and the account clean, the business qualifies for a bank overdraft or term facility, which then refinances the second mortgage. The dear money is temporary and buys access to the cheap money.
The warning sign
If a lump sum is needed to fund ordinary monthly losses with no event that repays it, neither facility is the answer. That is a profitability problem. See using a caveat loan for cash flow for the distinction between a timing gap and a structural one.
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Get matched with a funderFAQ
Which is cheaper?
Per dollar per year, the overdraft. But an overdraft of the size needed may not be available, and it takes longer to approve. Total cost depends on how much is drawn and for how long.
Can I get an overdraft with a tax debt?
Rarely from a bank. An outstanding ATO debt usually fails credit policy, which is one reason businesses use a second mortgage to clear it first.
Is an overdraft secured?
Larger business overdrafts are usually secured by property or a general security agreement over the business. Small ones can be unsecured at a higher rate.