A business overdraft is a short-term facility – typically provided by your bank – which can help cover business costs, emergencies, or to help manage your cash flow. Whether you’re managing a cash-flow gap or faced with emergency business costs, a business overdraft offers you a ‘buffer’ on your business bank account. It allows you to effectively borrow additional funds (at a set interest rate) when your balance goes below zero.
A business overdraft works by allowing you access to a set amount of cash beyond what’s in your account, and accessible once you go below zero. Most contracts are fixed for 12 months and it’s usually pretty straightforward to get an overdraft approved. However the amount you can be okayed for does vary depending on your business; it's normally far less than monthly turnover.
A business overdraft is a relatively inexpensive form of finance, typically costing an annual fee to maintain an overdraft facility, as well as an interest rate on the balance borrowed. Once your account is back above zero, you no longer pay the interest.
Most providers offer overdraft facilities at an interest rate of around 1.65% per month. This rate is usually tied to the base rate, a rate set by the Bank of England. If this rate rises, it’s likely the cost of your overdraft will too.
The annual fee tends to be between 1.50% and 1.75% of the approved limit, just to have the overdraft in place. There may also be security and guarantor fees to pay when making your application, so make sure to check these with your chosen provider before signing a contract.
An artisan baker has its high selling seasons at Easter and Christmas. They have to pay their suppliers in advance, so use their business overdraft of £20,000 to bridge the gap. Over three months at 1.65% per month, they are charged £990 in interest.
Will I have to provide a personal guarantee? Whether you’ll have to provide a personal guarantee to qualify for a bank overdraft depends on the strength of your business and the value of your assets. If the bank doesn’t think your assets are valuable enough to secure the overdraft against, they may ask you to sign a personal guarantee. This means you are legally liable for repaying the money borrowed, even if your business shuts down.
A business overdraft is callable. This means the bank can require you pay all outstanding sums and interest at their discretion – but they're probably not going to do this if you don't break the terms of your contract (if nothing else it would be incredibly bad PR).
Most small businesses will qualify for an overdraft, but they’re best used for managing cash flow rather than making big investments. If you’re looking for finance outside of your overdraft, find out about other forms of business funding including business loans, invoice factoring, merchant cash advances and more with our dedicated guides, featured below.