Overdraft
When a bank account balance goes negative.
An overdraft occurs when a withdrawal or payment exceeds the available balance in a bank account, causing it to go negative. Banks may honor the transaction (overdraft protection) and charge a fee ($25–$35 per occurrence) or decline it (insufficient funds). Some banks offer overdraft lines of credit as a lower-cost alternative to per-transaction fees.
Example
A business checking account with $500 processes a $750 vendor payment, resulting in a -$250 balance and a $35 overdraft fee from the bank.
Why It Matters for Your Business
Overdraft fees add up quickly and signal poor cash management—recurring overdrafts can damage your banking relationship and business credit.
Practical Tips
- •Set up low-balance alerts to catch potential overdrafts before they happen.
- •Link a savings account or credit line as overdraft protection to avoid per-transaction fees.
More Banking Terms
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
Related Financial Guides & Resources
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