A business overdraft lets your limited company keep paying out when the balance on its business current account reaches zero, up to a limit your bank agrees in advance. You pay interest only on the amount you're overdrawn, and only for the days you're overdrawn, which is why it's the facility most directors reach for when money goes out before it comes in. The part that's easy to miss is the arrangement fee, charged every year whether you draw on the facility or not.

What is a business overdraft?

A business overdraft is a form of credit attached to your business bank account. It gives your company extra funds, up to an agreed limit, when the account is no longer in credit.

The gap it covers is usually a timing problem rather than a shortfall in trade:

• Settling what you owe, or bridging a gap left by an overdue customer invoice.
• Paying wages or buying stock when cash is tight, perhaps to meet a spike in demand.
• Covering a cost you hadn't budgeted for, like an equipment repair.

For a lot of small businesses that gap is the normal state of affairs rather than a one-off. Our research, published in April 2026, surveyed 1,005 small business owners, and over a quarter (28%) had two months or less of cash in reserve. It bites hardest where income is uneven: seasonal trade, a few large customers, or payment terms you can't negotiate down.

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How does a business overdraft work?

Payments keep going out when your balance passes zero, up to your agreed limit. There's nothing to apply for each time and nothing to draw down. Effectively it's a loan of sorts, which you still have to pay back.

Interest is calculated daily on the amount you're overdrawn and charged monthly or quarterly, so it stops as soon as money lands and the account is back in credit. That's what makes an overdraft suit a dip of a few days: a week in the red costs you a week's interest.

Limits can vary from a few hundred pounds to tens of thousands, and published maximums on a business current account run from £500 to £50,000. Your bank sets yours against your turnover, your trading record, and your credit history rather than against the figure you ask for. You can ask for a higher limit later, though it will only agree if it believes you can repay the larger amount in reasonable time, and a higher limit usually means a fresh credit check and the arrangement fee charged again.

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Secured and unsecured business overdrafts

Most smaller limits are unsecured, which means no asset sits behind them. That sounds like the better deal, and often it is, but your bank manages the risk another way instead, with a higher interest rate or a lower limit. Where it wants more cover, for a larger facility or a company whose trading record it is less sure of, it can ask for security: NatWest says it may ask for 'a personal guarantee (sometimes with supporting security) and, in some cases, a charge over your business assets'. With a secured overdraft a business asset such as your commercial property or equipment stands behind the facility, and if you can't clear the balance within a defined period the bank could repossess it.

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Advantages and disadvantages of a business overdraft

An overdraft earns its place when the gap is short and hard to predict, because you pay only for the days you use it and there's nothing to arrange each time. It works less well for funding something over months.

Advantages

• A short-term facility that suits an uneven month rather than a long-term funding need
• Usually straightforward to apply for, with funds available quickly on smaller limits
• You use as much or as little of the agreed limit as you need, and pay interest only for the days you're overdrawn
• Nothing to pay for clearing the balance early
• On the rate, an arranged overdraft is usually cheaper than a business credit card

Disadvantages

• An arrangement fee charged every year, whether you use the facility or not
• A variable rate, which at some banks tracks the Bank of England base rate directly
• Limits on a business current account are small next to what a term loan can cover
• The facility is reviewed annually, and repayable on demand
• Going over the limit, or overdrawing without an agreement, costs more

The last three are the ones worth looking at closely, because they are where an overdraft differs most from a loan.

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What a business overdraft costs

An overdraft costs you two separate things: interest on the days you're overdrawn, and an arrangement fee charged every year whether you use the facility or not.

Santander publishes the arithmetic on a £1,000 arranged overdraft at its representative rate of 14.94% EAR, which is variable. A week in the red costs £2.69 of interest, a month £11.52, and two months £23.07. The annual arrangement fee on the same facility is 1.75% of the agreed limit with a minimum of £100, taken when the overdraft is set up and again at every renewal.

So on a small facility the fee is the cost, and the interest is close to a rounding error. Santander's own page puts it plainly: 'If you have an overdraft of £1,000 but don't use it, you'll still be charged the annual arrangement fee.' Clearing the balance early saves you interest. It doesn't touch the fee.

Rates are quoted as an EAR, the effective annual rate, which covers the interest and how often it compounds but not the fees, so read the two together. Across the banks that publish one, representative EAR on an arranged overdraft runs from 10.20% at the Co-operative Bank to 16.85% at Barclays, with HSBC at 14.54% and Lloyds at 15.62%. Fees vary more than rates do, and by limit as much as by bank: NatWest's runs from £50 on a limit up to £500 to 1.5% of the limit, minimum £150, above £5,000. The spread is wide enough to be worth half an hour, so it's worth comparing what the main banks charge before you commit. Every rate and fee here was read on the bank's own page on 14 October 2026.

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Going overdrawn without an agreement costs more

Going over your agreed limit, or overdrawing with no agreement at all, is charged separately and costs more. Lloyds publishes an unauthorised borrowing rate of 10.85% above the Bank of England Bank Rate, plus £12 a month if you have no authorised overdraft. Arranging the facility in advance is cheaper than discovering you needed it.

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Your overdraft is reviewed every year, and repayable on demand

An overdraft is an annual arrangement rather than a fixed-term loan. HSBC offers facilities 'for a period of 1 to 12 months', NatWest's is available over 12 months only, and Barclays says its overdrafts are 'repayable on demand and reviewed annually'.

In practice that means three things. Your bank can change the limit between reviews, and Santander says it can do so at any time. It can ask for the balance back on demand. And if the account sits in the overdraft month after month without returning to credit, the review is where a bank is likely to cut the limit or ask you to move the borrowing onto a term loan.

The rate can move between reviews as well, because most overdraft rates are variable. Lloyds and Bank of Scotland are the two that price theirs openly as a margin over the Bank of England base rate, and Lloyds says that if the base rate moves, 'your interest rate will move immediately by the same amount without any prior notice to you'. A rise like that shows up on your next interest charge rather than at your next review.

For a dip you expect to close, that's a reasonable set of terms. It does make an overdraft a weaker fit for funding you need in place for a known period.

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How to get a business overdraft

You apply to the bank that already holds your company's current account, online, by phone or through a relationship manager. An overdraft is normally only available from the bank that provides your business account, because the facility is attached to the account rather than sold on its own.

That makes the process fairly simple, since your bank can already see the money moving through the account. It will also look at:

• how long your business has been trading
• why you need the overdraft
• your cash flow
• any borrowing or credit facilities you already have
• the risk level of your industry

A company with little trading history will find an overdraft harder to get, because the bank leans on filed accounts and on the account's own record. Holding a business loan at the same time isn't a problem in itself: NatWest says it comes down to your total approved credit rather than to the products themselves.

Not every business account comes with an overdraft, and the app-based banks work differently from the high street. Monzo offers limited companies an overdraft of £500 to £5,000 at a representative 35.9% EAR, with an annual arrangement fee of £20 to £100 depending on the limit, and a personal guarantee from the director who applies.

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What the bank will ask for

Having your numbers ready is what separates a decision in days from a request for more information. Santander asks for five figures before an application: your turnover for the last 12 months, your business costs over the same period, your expected turnover for the next 12 months, your total annual debt repayments, and what you take out of the business for yourself.

NatWest asks for more: home addresses for the last three years for every director, your company registration number, and your year-end accounts or a cash flow forecast. Be accurate about the income you declare, because a figure that doesn't match the money going through your account can get the application referred or declined.

Expect to be asked for a personal guarantee as well. Barclays states that any lending up to £100,000 to a limited company will need one. A guarantee is your own legal commitment to repay the company's debt if the company can't.

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How a business overdraft affects your credit

Run well, an overdraft helps your company's credit profile rather than harming it. Short spells in the red, payments made on time and a balance that stays inside the limit all read as a business in control. Sitting at the top of the limit month after month, or going beyond it, reads as the opposite.

That record sits on your company's credit file, not your own. R3, the trade body for insolvency and restructuring professionals, says that even a company defaulting on a loan or entering insolvency 'will not have an impact on their personal credit record' for its directors, unless a personal guarantee changes that.

Two things can reach your personal file. The first is a credit search on you when the company applies, which may be soft or hard depending on the lender: Experian says a soft search doesn't affect your score, while a hard search only does 'if you make a lot of applications for credit in a short space of time'. The second is a personal guarantee, which the British Business Bank confirms doesn't affect your score when you sign it. The risk starts only if the company can't repay, the bank asks you to pay instead, and you then miss those payments. That chain is worth understanding before you sign one, and how an overdraft can affect your own credit file sets it out in full.

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What to use instead of an overdraft

If your bank says no, or the limit it offers is too small, what fits best depends on what's creating the gap rather than on which option is cheapest. Each of these is arranged away from your current account, so none rests on your own bank agreeing a limit.

Slow-paying customers. Invoice finance advances most of the value of an invoice as soon as you raise it, rather than leaving you to wait 30 or 60 days. It grows with your sales, because the facility is tied to your invoices rather than to a limit your bank sets once a year.

Everyday spending you clear each month. A business credit card gives you up to 42 to 56 days interest free on purchases if you pay the balance in full, and that window, rather than the rate, is its advantage over an overdraft. Carry a balance and it's the more expensive of the two: business cards charge more on the rate than an arranged overdraft, with representative APRs from 15.95% to 35.40% against arranged overdraft EARs of 10.20% to 16.85%.

A facility you want on standby. A revolving credit facility works on the same principle as an overdraft, letting you borrow up to a limit, repay and borrow again. It's agreed with a separate lender rather than attached to your account, and approval usually takes longer.

Equipment or vehicles. Asset finance spreads the cost over the asset's working life, with the asset itself as security, so it doesn't use up headroom you'd rather keep for cash flow.

Card takings you can borrow against. A merchant cash advance takes repayments as a percentage of your card sales, which suits a retailer or a hospitality business whose income rises and falls week to week.

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Where an iwoca Flexi-Loan fits

If payday comes before a big customer pays you, a Flexi-Loan can cover wages so your team is paid on time.

An overdraft on a business current account is agreed in thousands, while a payroll run, a VAT bill or a stock order can be tens or hundreds of thousands. So the gap can be short and the limit still too small for it, and asking your bank to quadruple a limit for one month of the year takes longer than the gap lasts.

Our Flexi-Loan is a business loan with flexible repayment options, and the amount isn't tied to your current account: you can borrow £1,000 to £1m. The objection directors raise at this point is the obvious one, that an overdraft covers a few days while a loan commits you for years. You choose a fixed term of between 12 months and five years, so you know the repayment schedule from the outset, and because there's no fee for repaying early you can clear it as soon as the cash arrives. Many of our customers only take out our finance for a few weeks, or even days.

Flexi-Loan in action: VCare24.

Victoria Simpson's social care business is paid by local authorities 30 to 60 days after the care has been delivered, while 200 staff need paying every month. She draws around £200,000 to cover payroll and repays it within a week, as the local authority payments come in.

Read Victoria's story

Large, predictable outgoings against customers who pay on their own timetable is where the amount you can borrow matters more than the rate.

If the lowest rate is what matters most to you, an arranged overdraft from the bank that already holds your account will usually cost less than borrowing from us, and for a gap of a few hundred pounds it's the simpler tool. Where a business loan from us earns its place is the amount and the timing: you can borrow well beyond a current-account limit, and what you pay falls when you repay early rather than sitting in an annual fee you can't get back.