Understanding Monzo business overdrafts

Now one of the UK’s leading digital banks, Monzo has enjoyed rapid growth in recent years. It’s now an increasingly popular choice for businesses, reflected by the FinTech provider doubling its business customer base last year. However, while Monzo offers business accounts and loans, its business overdrafts are only available for sole traders.

‍In this article, we’ll break down how Monzo’s business overdrafts work, discuss the benefits and drawbacks, and outline alternative finance options for limited companies, including small business loans.

How do 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 way to borrow money through the Monzo app.

• Credit limit: Eligible sole traders can apply for overdrafts up to £3,000. Monzo uses a ‘soft search’ during the account setup, meaning your credit score won’t be affected by the initial check​​.
• 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 Monzo won’t charge extra fees​ for so-called ‘unarranged overdrafts’.

Who is eligible for a Monzo overdraft?

Overdrafts are available only to sole traders already set up with a Monzo Business account. Unfortunately, limited companies are not eligible​. There is an eligibility checker on the Monzo website, where you’ll be asked questions about your financial situation, existing debt and more. 
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What are the interest rates for Monzo overdrafts?

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.

For sole traders, the Monzo business overdrafts can provide a quick cash buffer to manage short-term working capital needs, but as yet, limited companies using Monzo don’t have this facility available. 

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Pros and cons of Monzo business overdrafts

For sole traders, Monzo’s business overdrafts can be a handy tool for managing short-term cash flow issues. Below, we’ve outlined the main benefits plus a few drawbacks to consider:

Monzo overdraft benefits

• Flexibility: You can adjust your overdraft limit at any time and only repay what you use, helping you manage cash flow during short-term dips. This is 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, which is charged at the start of each month. This can be more cost-effective than some traditional bank overdrafts​.
• Digital convenience: Everything is managed through the Monzo app, making it quick and easy for sole traders to monitor their finances, adjust limits, or repay borrowed funds​​.
• Simple set-up: Overdrafts can be activated or adjusted directly through the Monzo app, offering full control to the business owner​.
• Transparency: Monzo makes a point of not charging hidden fees, providing more clarity than many high street banks​.

So, Monzo business overdrafts are a great option if:

• You’re a sole trader needing occasional, short-term cash flow support.
• You prefer a simple, digital banking experience with a user-friendly app.
• Your funding needs don’t exceed £3,000.

Drawbacks of Monzo business overdrafts

• Limited availability to many companies: The main drawback of Monzo business overdrafts is that they are currently only available to sole traders.
• Low overdraft limits: Monzo’s maximum overdraft amount is lower than more traditional banks. While this may be adequate for some sole traders’ needs, others will seek higher amounts.
• High interest rates: Monzo’s business overdraft interest rates are relatively high when compared to many other overdraft providers and other business finance options.

Monzo's decision to limit its business overdrafts to sole traders means that growing businesses with more complex needs, who often require larger, more flexible funding options, turn to alternative finance sources.

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Alternatives to Monzo business overdrafts

If you're a limited company or a sole trader requiring greater flexibility, there are plenty of alternative funding options available to explore. Here are some alternatives to Monzo Business overdrafts for you to consider:

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Digital small business loans

For limited companies needing quick access to finance, a short-term business loan may be a better option. Monzo offers business loans up to £25,000 for sole traders. However, numerous fintechs and digital finance lenders can offer larger capital amounts with flexible repayment options. 

iwoca offers flexible business loans from £1,000 to £1,000,000, with repayment 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 hours.

We’ve helped over 150,000 small businesses invest in growth, manage their cash flow and keep up with changing market conditions. Unlike business overdrafts, which are designed for temporary cash flow gaps, a business loan can help with larger investments or ongoing working capital needs.

Benefits of iwoca Flexi-Loans include:

• Speed and flexibility: Our application process is simple, fast and tailored to your needs. Get a decision within a day, with funds available in a few hours after approval.
• Larger funding limits: If your business requires larger funding amounts than with overdrafts or other loans, iwoca can offer up to £1 million, depending on your application. So, whether you're looking to expand, invest in equipment, or manage cash flow over a longer period, iwoca's loans offer sizable funding limits and tailored repayment terms.
• 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.

Business credit cards

For day-to-day flexibility and small credit uses, a business credit card offers flexible, revolving credit for one-off purchases or to cover 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 needing short-term credit with clear repayment plans.

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 future card sales. 

This fluctuating repayment model means you pay more when business is good and less when it's slow. It’s handy for seasonal businesses and those needing fast access to funds without fixed repayment schedules.

Invoice finance

Invoice financing 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. 

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How to choose the right finance for your business 

Monzo business overdrafts are a convenient, flexible option for sole traders, offering a transparent, digital solution for managing short-term borrowing. However, if you’re a limited company or need more funding than Monzo’s overdraft facility can offer, finance alternatives like iwoca’s Flexi-Loan can provide greater accessibility, larger limits and repayment options aligned with cash flow.

To decide what the right finance option for your business is, consider the following questions:

• Are your funding needs temporary, short-term or long-term?
• How quickly do you need the funds?
• How much finance do you require for working capital needs?
• What level of flexibility do you need from the credit facility?

Here's a quick-glance comparison table between Monzo business overdrafts and iwoca Flexi-Loans:

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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. You can use our handy loan calculator to work out your likely repayments.

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