How do overdraft fees affect small businesses?

Overdraft Fees

Many of us have done it. Whether in our personal checking or business accounts, many of us have been hit with an overdraft fee.

Overdraft fees are a bitter reminder of how challenging it can be, at times, to manage finances, especially if you’ve ever been in a situation in which cash is limited but the expenses don’t stop.

What are overdraft fees?

When a bank account holder overdrafts because there isn’t enough funds for a payment or withdrawal, they will need to pay a fee to cover the negative balance.

Accounts enter overdraft territory for different reasons. Common causes include:

  • Decreased cash flow
  • Being unaware of a bank’s overdraft policies
  • Not keeping track of account balances
  • Failure to receive payments from clients

Overdraft fees in the U.S. can average about $30 dollars, but they can also fall in a range of mid $20s to mid or high $30s.

Here’s a free trivia fact to impress your friends: According to The Royal Bank of Scotland, the first overdraft fee was charged in the year 1728.

Eventually, overdraft protection programs, which often come with their own set fees, were added to the mix.

If you’re not careful, or don’t read the fine print of your bank’s policies, you could end up paying:

  • One-time overdraft fees
  • Fees for overdraft protection, which in some cases come with a line of credit in which interest accrues
  • Extended overdraft fees
  • Nonsufficient funds (NSF) fees
  • Additional bank fees, such as for maintenance or other features

Finding low fee options is great, and a no-fee account would feel even better. Each bank will have its own overdraft policies so as a best practice, make sure you understand if any fees are associated with your account.

In recent years, the government has implemented consumer protections to more fairly support workers, self-employed folks, and small business owners. In 2010, an overdraft protection law came into effect that prohibited banks from automatically enrolling its customers into overdraft protection programs—leaving it up to the customer to determine how to opt-out.

Instead, customers now have to opt-in to an overdraft protection program.

A handful of banks have taken even bigger strides and have adopted zero overdraft fee policies.

Overdraft facts

  • 40 million people paid overdrafts fees in 2015
  • Forbes reported that in 2017, overdraft fees in the United States totaled $34 billion dollars
  • 68% of consumers would rather have the incurring fee canceled rather than to be covered and charged an overdraft fee
  • Younger account holders seem more susceptible to overdraft fees
  • The vast majority (more than 4 out of 5 Pew research respondents) of overdrafts are a unintentional (the individual didn’t know how much money was in the account at the time of the purchase)

The Pew’s consumer finance project has concluded on numerous occasions that, “Too many banks, both large and small, charge high and multiple fees and engage in practices that are unfair,

Are freelancers and small business owners susceptible to overdraft fees?

Freelancers and small business owners rely on positive cash flow for maintaining a healthy business and making a living (in addition to personal expenses). 

Recently, in The State of Small Business Cash Flow, Intuit Quickbooks reported that among small business owners:

  • 32% have been unable to pay themselves at some time
  • 61% regularly struggle to pay themselves
  • Approximately a third have been unable to fulfill cash payments to employees, vendors, themselves, or pay loans at some point

And as Forbes points out, often the lack of cash flow isn’t due to not having any work or income, but rather not having enough available funds. In the Quickbooks survey, small business owners said delayed payment processing and not being paid on time contributed to not having enough funds. As they deal with these issues, expenses such as payroll, materials, or rent still have to be paid monthly. For some, this can lead to overdrafting. 

So yes, freelancers and small business owners can easily face a cash flow problem, which could result in transactions that drift into overdraft territory, resulting in a fee.

If a business owner is already struggling with cash flow, a bank overdraft or a non-sufficient funds, fees can really sting.


Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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