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What is a business overdraft?

A business overdraft allows you to borrow money via your business bank account according to pre-agreed terms. In most cases, these terms include a fee to access the facility. 

Overdrafts are designed as a solution for short-term borrowing. They come with an overdraft limit, which dictates how far below £0 your account balance can go.

When you borrow money this way, you have to pay interest and often fees. Most business overdrafts charge daily interest on the amount being borrowed. However, you only pay interest for the days you are overdrawn. 

Unlike a business loan, you decide how quickly you pay it off. You can often increase or reduce your overdraft limit according to your business needs. However, if you go overdrawn without arranging a business overdraft, or exceed your arranged overdraft limit, your overdraft will be classed as unauthorised. This generally results in much higher fees and interest charges and may even result in the bank refusing to honour payments made from your account.  

Benefits of using a business overdraft

• They’re easy to get. If you have a business bank account, you can usually arrange a business overdraft. However, the amount you can borrow will depend on your finances and how you manage your accounts

• They’re quick to arrange. Most banks allow you to apply for a business overdraft online or over the phone and can set one up almost immediately once approved. Remember though that all credit applications involve credit checks prior to approval

• They’re a handy cash flow management tool. Setting up an authorised overdraft can help you avoid paying higher charges should you slip into the red

• They can be paid off quickly, and there are no early repayment penalties. Plus, you only pay interest when you’re overdrawn, making them more flexible than a business loan

Risks of using a business overdraft

• They’re expensive in the long term. The interest rates are often much higher than with other forms of borrowing, such as business loans

• They can be reclaimed without notice. Some banks reserve the right to demand full repayment at any time

• They involve extra account fees. You usually have to pay a fee to access an overdraft facility on your business bank account

• They’re designed for smaller amounts. Your business overdraft limit is likely to be lower than with other financing options

• They’re not always approved. Your business overdraft application may be rejected if the bank is concerned about your ability to repay the debt

What are the alternatives to a business overdraft?

You could consider the following options instead of an overdraft:

• Business credit cards. These are best suited to short-term borrowing. The fees and interest charges are likely to be similar to those on a business overdraft

• Business loans. These can give you access to much larger sums, particularly if you put up a business asset as security. The interest rates are usually fixed and lower than on business overdrafts, but the repayment terms are less flexible

• Invoice finance. This offers a way of unlocking the cash tied up in your outstanding invoices

• Asset finance. This allows you to spread the cost of a business asset