Understanding Monzo business overdrafts

In this article, we will break down how Monzo’s business overdrafts work, why they could be beneficial for businesses, and the alternative finance options available for limited companies, including small business loans.

October 22, 2024
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Monzo, one of the UK’s leading digital banks, is an increasingly popular choice for businesses – doubling their business customer-base in the last year. However, while Monzo business overdrafts are available for sole traders, there is not currently a formal overdraft facility available for limited companies.

How Monzo Business Overdrafts Work

Monzo business overdrafts are designed for sole traders who need quick access to additional funds. These overdrafts are integrated within the Monzo Business account, offering a simple, straightforward way to borrow through the app.

Here’s how Monzo's business overdraft works:

  • Eligibility: Overdrafts are available only to sole traders already set up with a Monzo Business account. Unfortunately, limited companies are not eligible​. 
  • Credit limit: Eligible sole traders can apply for overdrafts up to £2,000. Monzo uses a ‘soft search’ during the account setup, meaning your credit score won’t be affected by the initial check​​.
  • Interest rates: Monzo offers three interest rate tiers based on your credit score: 19%, 29%, or 39% EAR (Effective Annual Rate)​​. Interest is calculated daily on the amount borrowed and is charged monthly, making it essential to manage repayments effectively.
  • No extra fees: There are no hidden or additional charges for using the overdraft. If you exceed your overdraft limit, payments will be rejected (except in certain situations, like TfL transactions), but there will be no extra fees​.

Features of a Monzo business overdraft

  1. Simple setup: Overdrafts can be activated or adjusted directly through the Monzo app, offering full control to the business owner​.
  2. Flexible repayment: Interest is charged only on the days your account is overdrawn, which can help businesses manage cash flow during short-term dips​.
  3. Transparency: Monzo makes a point of not charging hidden fees, providing more clarity than many high street banks​.

For sole traders, the overdraft can provide a quick cash buffer to manage short-term needs. 

However, Monzo's decision to limit its business overdrafts to sole traders leaves limited companies stranded. For growing businesses with more complex needs, who often require larger, more flexible funding options, this means turning to alternative finance sources.

Why Monzo business overdrafts are useful

For sole traders, Monzo’s overdrafts can be a handy tool for managing short-term cash flow issues.

  • Flexibility: Adjust your overdraft limit at any time and repay only what you use. This makes it ideal for businesses with variable income, where you may need a financial buffer during quieter months.
  • Low overheads: Monzo doesn’t charge extra fees for setting up or using your overdraft, so you’ll only pay interest on what you borrow. This can be more cost-effective than some traditional bank overdrafts​.
  • Digital convenience: Everything is managed through the app, making it quick and easy for sole traders to monitor their finances, adjust limits, or repay​​.

All this means that Monzo business overdrafts are a great option if:

  • You’re a sole trader needing occasional, short-term cash flow support.
  • You prefer an app-based, simple banking experience.
  • Your funding needs don’t exceed £2,000.

Alternatives to Monzo business overdrafts

If you're a limited company—or even a sole trader needing more flexibility—there are plenty of alternative funding options available.

1) Digital small business loans

For limited companies needing quick access to finance, a short term business loan may be a better option. 

iwoca offers digital small business loans from £1,000 to £1,000,000, with terms as short as one day or as long as five years. And since it’s all online, you can get approved in as little as 24 hrs.

We’ve helped over 120,000 small businesses invest in growth, manage their cash flow and keep up with changes in the market. And unlike overdrafts, which are designed for short-term needs, a business loan can help with larger investments or ongoing projects​​.

  • Speed and flexibility: With iwoca, the application process is simple, fast, and tailored to your needs. Get a decision in as little as 24 hours, allowing you to access funds when you need them​.
  • Larger funding limits: If your business needs more than £2,000, a business loan from iwoca can provide a more suitable option. Whether you're looking to expand, invest in equipment, or manage cash flow over a longer period, iwoca's loans offer more flexibility​.
  • Banking agnostic: No matter which bank you use as your primary account, you can get the funds in your account fast – and you’ll only pay interest on the amount you draw down.

2) Business credit cards

For day-to-day flexibility and small credit uses, a business credit card can offer flexible, revolving credit that can be used for one-off expenses or unexpected costs. 

Many cards come with interest-free periods and rewards like cashback or air miles, making them a handy tool for managing short-term financial needs. However, interest rates can be high if balances aren’t repaid in full each month, so you’ll need to keep an eye on how much you’re using them. Business credit cards work best for companies that need short-term credit with clear repayment plans.

3) Merchant cash advance (MCA)

For businesses working primarily with card or online sales, a merchant cash advance can help you access finance, without taking on the traditional repayment schedule of borrowing.

With an MCA, you receive a lump sum upfront, and repayments are automatically deducted as a percentage of your daily card sales. This flexible repayment means you pay more when business is good and less when it's slow. It’s handy for businesses needing fast access to funds without fixed repayment schedules.

4) Invoice finance

Invoice finance is another form of borrowing set against future revenue, where businesses can unlock cash tied up in unpaid invoices. 

This option is especially useful for B2B companies with long payment terms. Instead of waiting 30, 60, or even 90 days for payment, you can receive up to 90% of the invoice value upfront. This improves cash flow without taking on new debt, and the balance is paid once your client settles the invoice. 

How to choose the right finance for your business 

Monzo’s business overdraft is a convenient, flexible solution for sole traders, offering a transparent and digital-first way to manage short-term borrowing. However, if you’re a limited company or you need more funding than Monzo’s overdraft can offer, alternatives like iwoca’s Flexi-Loan can provide greater accessibility, larger limits, and longer repayment options.

See how easy it is to apply for a loan with iwoca and discover how we can help your business access the flexibility you need.

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Henry Bell

Henry is an experienced financial writer with 8+ years of expertise covering the financial industry and small-to-medium enterprises (SMEs).

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