With the rise in digital payment systems and e-commerce applications, the average small business is inundated with a wide variety of expenses. In addition to paying utilities, rent, and other bills on time, overheads now often include Facebook business advertising fees and website hosting costs. Add to that the limitless pool of payment systems and e-wallets customers require, and small businesses are juggling more expenses than ever before.
Too often, these expenses are paid out of the same checking account, and with the volumes of inflows and outflows continually changing, small businesses may find themselves paying overdraft and other late fees.
Per-transaction fees of around US$34 may not seem much at first, but find yourself overdrawn again and again, and the fees quickly add up. Research by Moebs Services found that American consumers paid US$34.3 billion in overdraft fees in 2017, US$1 billion more than in 2016. The 2017 total was also the largest since the 2009 recession when many small businesses found themselves cash-strapped due to non-payment by customers.
This does not necessarily mean more consumers are overdrawing, as Moebs Services discovered that both banks and credit unions have slowly raised overdraft fees over the past few years, to an average of US$30 per transaction, compared to US$20 and US$15 in 2000. If you need to use an overdraft facility, make sure it is well worth the fee.
Types of overdraft facilities
The Association of Chartered Certified Accountants (ACCA) notes that “overdrafts are often used to ease pressures on working capital and as a back-up for unexpected expenditures.” Overdrafts, essentially, can be a type of financing for businesses that have fluctuating working capital – and doesn't that describe most small businesses?
While overdrafts themselves may not be wholly detrimental to a small business, the structure of fees levied by your bank or credit union can make or break your business. There are four common types of overdraft fees:
- Overdraft: charged each time a bank approves a transaction that exceeds your account balance; varies from as low as US$9 to US$39 per transaction.
- Non-sufficient funds (NSF): maybe you're okay with the bank charging a one-off fee for processing a transaction that sends your account into overdraft, but did you know banks also charge an NSF fee when they reject such transactions? NSF fees are usually around the same rate as overdraft fees.
- Overdraft protection: One-way businesses avoid overdraft/NSF fees are by linking another account (usually a savings account) to the checking account. Payments that would otherwise overdraw an account are instead transferred from the linked account. For every such transfer, banks can charge an overdraft protection fee. This ranges from US$0 to US$15 at major US banks.
- Extended overdraft: Also called the sustained overdraft fee, it is charged by banks when you leave your account overdrawn beyond a certain number of days. This ranges from three days to ten days, with fees rising as high as US$36 for every interval. Some banks do not charge for this, so look through the fine print when you sign up for a bank account.
5 steps to avoid overdraft fees
Since 2010, consumers must opt-in for overdraft protection programs for one-time ATM withdrawals or debit card transactions. However, the change in regulation does not affect recurring payments such as direct debits for utilities and rent – for those you still need to opt-out. Here are five easy steps small businesses can take to avoid paying exorbitant overdraft fees:
- Don't opt-in to overdraft protection: Seeing as overdraft protection fees are one-third of the typical overdraft/NSF fees, banks may tell you that an overdraft protection plan is a more cost-effective way to manage overdraft costs. However, since the change of regulation in 2010, overdraft protection plans are optional. Read through the fine print of your checking account agreement to understand how the overdraft protection fees are structured, and if your bank charges NSF fees.
- Link additional accounts if you do opt-in: So you've compared the NSF/overdraft fee structure against your bank's overdraft protection plan, and decided to opt-in. Now, ensure you link accounts with sufficient balances to cover any shortfall in payments or working capital in your checking account. Typically, small businesses should link savings accounts, as linking a credit card may result in being charged twice: an overdraft protection fee to transfer funds over, and credit card interest on the linked card.
- Keep your eye on the ball: With many banks now going 'green' and reverting to e-mail statements, it is easy for a low-balance alert to slip your notice in a full inbox. The onus is on you as the business owner to monitor your checking accounts regularly, in addition to signing up for account alerts from your bank whenever your balance drops below a certain threshold. Whether using the bank app or getting notified via SMS/ e-mail alerts, ensuring your balance is sufficient is paramount to avoid overdrawing.
- Have a cushion in your account: Another way to keep your checking account from being overdrawn is by setting aside a set amount or percentage of business income monthly or weekly to cover additional transactions. Budget for miscalculations, additional stock requirements, or even delayed payments from customers with a cash cushion.
- Track and understand purchases: Not all purchases are created equal. Automatic bill payments, for instance, are debited from your account on set dates. Online purchases may differ by product or vendor – some are processed upon order, some only when the product is shipped. Checks are the least predictable, as they can be cashed up to several weeks after being made out. Track your purchases and payments, and avoid paying exorbitant overdraft or NSF fees due to lack of foresight.
The devil, they say, is in the details. As with other aspects of running a business, read the fine print of your bank account agreement, and if possible, talk to your bank agent or relationship manager to get a full overview of how the overdraft and late fees are structured. With clarity, only then can you decide if an overdraft facility would be a boon or a detriment to your business.