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Jul 14, 2011 - 2 minute read - Comments - banking

Comparing Small Business Overdrafts at Canada's Banks

Overdrafts for small business bank accounts are attached to a business’s account so that if a cheque takes the account below a $0 balance, the overdraft will be there to pay the cheque. These overdrafts are usually meant to cover small, short term deficits in cash flow. Due to their higher interest rates, they are not the most ideal bank product for long term borrowing needs. Businesses with larger cash flow financing needs, such as those with accounts receivable, should look at a business operating line of credit instead.

The following table compares the overdraft product at the Big 5 Canadian banks.

Feature RBC BMO CIBC TD Scotia
Maximum Limit $5,000 N/A $10,000 $10,000 N/A
Interest Rate Prime + 5.0% N/A Prime + 5.0% Varies N/A
Monthly Fee $10 or $5/cheque N/A $9.50 $10 N/A
Application Fee None if electronic,
$25 in branch
N/A None None N/A
Link Website N/A Website Website N/A

The Bank of Montreal and Scotiabank do not actively promote a small business overdraft product. They most likely offer an operating line of credit product to clients who have a need for a small business overdraft. This many not be price competitive and the application process will certainly be more in depth than for a simple overdraft. Make sure you get the details before going forward.

Generally speaking, the bank will make its lending decision by running a personal credit check through Equifax or Trans Union. The bank will then calculate a credit score based on this information and an automated system will recommend an appropriate overdraft limit for you. The algorithm that is used to calculate the overdraft limit is kept secret by the bank because they don’t want people attempting to game the system, but your personal credit record will factor heavily into the recommendation. Your local banker usually has little power to increase the recommended limit.

A small business overdraft might make sense if your business operates on its own cash but at times the balance on its account comes close to zero. An overdraft might save you the embarrassment of having a cheque returned NSF.