Quick answer
A right of set-off lets a bank use money in your account to pay a debt you owe it, such as an overdue business loan, usually by combining the balances. If your loan and trading account sit at the same bank, that cash is within reach. Before signing, check the wording, ask for notice and carve-outs for payroll money, and consider keeping the trading account elsewhere.
Key points
- Set-off lets a bank apply money in your account against a debt you owe that same bank, so the loan and the account stop being separate things.
- It matters most when you're late or in breach, which is exactly when you need your cash for wages and suppliers.
- Check the account terms and the loan documents, and look for words like 'combine', 'consolidate', 'set off' or 'apply any credit balance'.
- Asks worth making: written notice before use, a carve-out for payroll and tax money, and a clear statement of which accounts are covered.
- Splitting where you borrow and where you do your day-to-day banking is a legitimate shopping decision, not disloyalty.
You can be one payment behind on a business loan, with $38k sitting in your everyday account earmarked for wages, and find the bank has moved the lot against the debt. It’s a small clause that does it, usually written into the account terms or the loan documents, and it is called a right of set-off.
This guide is for the shopper who is still comparing offers. It’s about what to look for before signing, not what to do after the bank has already acted.
What is a right of set-off on a business bank account?
It’s the bank’s right to use money you hold with it to pay money you owe it. Instead of treating your loan and your account as two separate relationships, the bank nets them against each other.
You may see it written as “set-off”, “combine”, “consolidate accounts” or “apply any credit balance in any account towards amounts owing”. The wording differs between banks, but the effect is the same: cash in your trading account can be applied to a debt in the same name.
Set-off is not about the loan being large. It bites when two things are true at once: you owe the bank something that is due, and you hold a balance in the same bank. Which means it is far more likely to matter when you’re having a hard month than when you’re not.
Can my bank take money from my account to repay my loan?
If the debt is due and the documents give the right, yes, it’s possible. How much notice you’d get, and whether certain money is protected, depends on the exact terms you signed. Don’t assume you’d get a warning.
A few things to check in your own paperwork:
- Which debts count. Some forms cover only the loan in question. Others use an “all money” or “all obligations” wording that pulls in your overdraft, credit cards, equipment finance and guarantees.
- Which accounts count. Check whether it’s just the account you named, or any account at the bank in your name, or even accounts of related entities you’ve guaranteed.
- Whether notice is required. Some terms say the bank may act without telling you first. Others promise notice afterwards, or beforehand.
- Money that isn’t yours. Funds held on behalf of others, for example in a trust account set up for that purpose, are a different question. Put it to your lawyer or accountant before you rely on that.
business.govt.nz stresses understanding “the loan’s terms and conditions” before you commit. Set-off wording is a good test: it’s rarely in the headline summary, and it’s worth finding on purpose.
Does a freeze work the same way?
No, and it’s worth keeping them apart when you read an offer.
| Set-off | Account freeze or restriction | |
|---|---|---|
| What happens | Money in the account is applied against a debt you owe the bank | You can’t use the account (or part of it) |
| Effect on your debt | The debt reduces | Nothing, until the bank acts further |
| Effect on your cash flow | The cash is gone | The cash is stuck |
| Where it’s written | Usually the account terms or loan documents | Usually the account terms, sometimes the facility letter |
A bank might hold a balance first and apply it later, which feels like both. If a lender is also able to call in the debt under an on-demand clause, set-off can follow quickly, because the debt becomes due the moment it’s demanded.
How does keeping everything at one bank change the risk?
It concentrates it. Convenience is real: one login, one relationship manager, a bank that sees your whole turnover. Our guide to borrowing from your own bank covers the benefits properly. The trade-off is that your borrowing and your working cash sit within the same reach.
Illustrative example. A plumbing business in Tauranga has a $150k term loan and a trading account at the same bank. Two big customers pay late in the same fortnight, and the owner misses a loan instalment by six days. The trading account holds $42k, which was meant for the fortnightly pay run and a supplier’s account.
| Everything at one bank | Trading account at a different bank | |
|---|---|---|
| Overdue loan amount | $6,200 | $6,200 |
| Cash in the lender’s reach | $42,000 | $0 |
| Worst case for the pay run | Account could be reduced by the overdue amount, or more if the terms allow | Pay run unaffected |
| Convenience | One bank, one view | Two logins, a day’s delay moving money |
The owner wasn’t going to lose $42k, and many banks would ring before acting. The point is that the contract allowed the bank to, and that is a different position from one where the cash was never within its reach. You pay for the second position in a little admin.
What should you ask for before you sign?
Four asks, from easiest to hardest. Our guide to negotiating business loan terms has the wording for pushing back politely.
- Show me the clause. Ask: “Which document gives you a right of set-off or account combination, and which of my accounts and debts does it cover?” A plain answer tells you a lot about the stall.
- Written notice first. Ask: “Will you agree to give me written notice before you use set-off, except where I’ve been in default for more than 30 days?” It won’t always be granted, but it costs nothing to ask.
- A carve-out for payroll and tax money. Ask: “Can we agree that set-off won’t apply to a named wages account?” Some banks will agree, particularly if the account is separate and clearly labelled.
- A narrower debt list. Ask for the loan documents to cover only this facility rather than “all money owing”, especially if you also have an overdraft or equipment finance elsewhere in the same bank.
If the lender won’t move on the clause, that’s information you can compare, not a reason to walk away. Weigh it against the rest of the offer in the offer comparer, including the other one or two quotes you should have.
Not sure where your own offer lands? Tell us what you’re comparing and we’ll help you work out which stall suits your cash flow.
Where else can the lender’s reach come from?
Set-off is one way a lender gets at your assets. It isn’t the only one, and it helps to see the set together:
- A general security agreement or mortgage. These give the lender security over business assets or property, registered publicly. The PPSR explains how security over business assets is registered. Our secured overdraft guide covers how far this can reach.
- A personal guarantee. If you’ve guaranteed the company’s debt, your own accounts at that bank can become relevant.
- Cross-default. A problem with one facility can put others at risk of being called. See reading a loan offer for the order to check these in.
Each reaches differently, so list them all on the shopping sheet next to the fees.
What can you do if you think the bank got it wrong?
Start by asking the bank to explain in writing which clause it relied on and which debt it applied the money to. If you’re not satisfied, the Banking Ombudsman Scheme may be able to look at it. Its July 2025 terms of reference say it serves companies and trusts as well as individuals, and people who guaranteed or provided security for a loan, with a claim limit of $500,000. Check its current process before you rely on it.
None of that is a reason to expect trouble. It’s a reason to read the clause now, when you can still ask for it to change.
Ready to see which offers leave your cash alone?
Choosing a lender isn’t only about the limit and the fees. It’s also about how close the lender sits to your day-to-day money, and what happens to your pay run in a tight month. We talk through exactly that with business owners, and we’re happy to look at yours.
The enquiry takes about a minute, and asking won’t touch your credit file, because there’s no credit check just for enquiring. We don’t send your details to a pile of lenders, so your phone won’t light up with calls from strangers. A real person reads your situation, thinks about how you bank as well as how much you want to borrow, and rings you to talk it through. Please fill the form in accurately, including which bank holds your accounts and what you’d offer as security, so the first option we bring you fits.
Frequently asked questions
Can my bank take money from my business account to repay my loan?
If you owe the bank money that is due and the terms give it a right of set-off, it can apply the credit balance in your account against that debt. Whether it can, and how much notice it must give, depends on your account terms and loan documents, so read both. Money you hold on behalf of someone else, such as in a properly established trust account, is a different question to put to your lawyer.
Does set-off apply to an overdraft and a term loan?
It can apply to any debt you owe that bank, so an overdraft, a term loan, a credit card and a lease may all be pooled against balances in your accounts. Many bank forms spell this out in an 'all money' or 'all obligations' clause, so check which of your facilities are listed.
Is set-off the same as the bank freezing my account?
No. A freeze stops you using the account. Set-off actually moves money from the account against the debt. Banks can do both, and the documents may give them separate rights, so look for each when you read the offer.
Does it matter if the account is in a different name from the loan?
It often does. Set-off usually works between debts and balances held by the same person or entity, though guarantees and cross-guarantee clauses can bring in other names. If you're a director or trustee, check what you've personally guaranteed, because a guarantor's own accounts at that bank can become relevant.
Can I complain to the Banking Ombudsman if I think a bank used set-off unfairly?
Possibly. The Banking Ombudsman Scheme's July 2025 terms of reference say its services are provided to individuals, groups such as partnerships and families, companies and trusts, and also to people who guaranteed or provided security for a bank loan. The scheme can decline complaints that exceed its claim limit of $500,000 or fall outside its rules, so check its site first.
Should I keep my trading account at a different bank from my lender?
Often it's worth considering. You give up some convenience and perhaps a relationship benefit, but your day-to-day cash is no longer in reach of the lender if things get tight. It works best when the cash you need for wages and suppliers sits at a different stall from your borrowing.