What Overdraft Fees Are for Businesses & How They Work

An overdraft fee is a charge you pay to your bank when you overdraw your account. Typically, when you make a transaction, such as a check, withdrawal, or debit card purchase, whose cost exceeds the funds available in your account, your bank may approve the transaction and shoulder the cost, which causes your account balance to become negative. Most banks will charge fees per overdrawn transaction and require you to compensate for the amount overdrawn within a specific timeframe.

Because banks don’t offer overdraft coverage automatically, you would typically have to opt-in to activate the service when you open a business bank account. Additionally, not all banks allow you to overdraw your account—some will decline transactions against insufficient funds.

Overdraft Fee Example

Let’s say you need to dole out payroll soon, and your employees’ salaries amount to a total of $62,000. However, your business checking account has an available balance of only $60,000 and your client hasn’t paid their most recent bill. Instead of forcing your employees to wait on the late payment, you withdraw $62,000 to distribute among your employees, leaving you with a negative balance. The bank charges you an overdraft fee for this transaction.

To continue the above example: if, later on 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 charge overdraft fees on a per-transaction basis.

How Is an Overdraft Fee Charged?

If you opt-in for overdraft coverage, you’ll be charged an overdraft fee whenever you make a transaction that requires your bank to deplete more funds than what’s available in your account balance. These transactions include swiping your debit card, withdrawing cash from an ATM, making an automatic payment, or having your client cash in a written check.

Instead of letting the bank overdraw your account, you can opt for overdraft protection services. These pay for transactions using linked accounts or lending solutions, such as linked deposit accounts, lines of credit, or credit cards, instead of drawing money from your 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 clearer picture of overdraft coverage costs, we’ve listed the fees charged by a few of the best banks for small businesses.

Chase: $34 per overdraft item starting with the first transaction that overdraws your account by $50.
Bank of America: $10 per overdraft item over $1.
Axos Bank: $25 per overdraft item.
U.S. Bank: $36 per overdraft item if the transaction exceeds $5 and your negative available balance is greater than $50.
Silicon Valley Bank: $30 per overdraft item.

It’s important to know how your bank processes debit transactions to your account. If your bank clears the largest transaction first, you could be hit with 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 settle 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 a few banks that don’t charge overdraft fees:

First Internet Bank: The online-only First Internet Bank eliminated overdraft fees for small business accounts in March 2022.
Lili*: The Lili BalanceUp feature covers overdrawn Visa Business Debit Card transactions up to $200 fee-free.
Mercury*: This fintech solution charges no fees for overdraft items.
Santander Bank: This bank doesn’t charge for transactions that overdraft your account by $100 or less.

*Providers are financial technology (fintech) platforms backed and Federal Deposit Insurance Corporation (FDIC)-insured by a supporting bank partnership (Choice Financial Group for Lili and Evolve Bank & Trust for Mercury).

Ways To Avoid Getting Charged Overdraft Fees

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

Opt-out 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 get declined if your account doesn’t have sufficient funds to cover them.
Sign up for online banking: Web and mobile banking platforms let you view your account balances anytime, anywhere. Keep track of your funds to avoid making transactions that make your balance negative.
Track your financial transactions: Stay on top of your check transactions and automatic payments to ensure that you have enough balance in your account.
Sign up for balance alerts: Some banks let you set up email or mobile text alerts that notify you when your account falls below a certain threshold. With balance alerts, you’ll know when to deposit extra funds or postpone unnecessary transactions.
Put extra funds in your account: Create a buffer by ensuring that you 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: It’s essential to know and understand the bank’s overdraft policies to help you save on overdraft fees later on. Find out how your bank processes the debit transactions in one day. If your bank processes the smallest transaction first, you’ll have a lesser risk of getting charged with multiple overdraft fees in case you have more than one debit transaction on the same day.

Bottom Line

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