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A business overdraft lets you draw on a pre-agreed limit attached to your existing bank account, giving you fast access to short term cash when you need it. The main pros are speed, flexibility and only paying interest on what you use. The main cons are variable rates, fees, and a facility your bank can reduce or withdraw at short notice. Weighing up these pros and cons before you apply is the best way to work out whether a business overdraft suits your cash flow needs, or whether another type of finance is a better fit. In this guide we cover how a business overdraft works, what it costs, who qualifies, and how it compares with a business loan or a revolving credit facility, so you have everything you need to make an informed decision.
What is a business overdraft and how does it work?
A business overdraft is a facility attached to your business current account that lets you spend more than the balance you hold, up to an agreed limit. You only pay interest on the amount you actually draw, and once you repay it, the full facility becomes available again without you needing to reapply. Most banks offer two versions. An arranged overdraft is agreed with your bank in advance and comes with a set limit and fee structure. An unarranged overdraft happens when you go over your agreed limit, or spend without any agreement in place, and it is charged at a much higher rate.
What are the pros of a business overdraft?
A business overdraft is popular with small and medium sized businesses because it is quick to access and only costs money when it is used. The main advantages are:
What are the cons of a business overdraft?
A business overdraft is not without risk, and it is worth understanding the drawbacks before you rely on one. The main disadvantages are:
How much does a business overdraft cost?
A business overdraft typically costs an arrangement fee plus variable interest on whatever you draw down, with much steeper charges if you go over your limit. The table below shows the ranges you can expect to see from UK banks in 2026.
Cost | Typical range | Notes |
|---|---|---|
Arrangement fee | 0.5% to 2% of the limit, often with a minimum of around £100 to £250 | Usually charged annually, whether or not you use the facility |
Interest on drawn balance | Bank of England base rate plus roughly 3% to 8% | Only charged on funds you actually use, not the full limit |
Unauthorised borrowing | A monthly fee of around £12, plus a much higher interest rate | Applies if you exceed your agreed limit or have no agreement in place |
As an example, with the Bank of England base rate sitting at 3.75% for much of 2026, a typical arranged business overdraft has cost somewhere between 6.75% and 11.75% EAR on drawn balances, though this varies by bank and by your business credit profile.
How do you qualify for a business overdraft?
Banks assess your business overdraft application against your trading history, credit profile and how you use your existing account, rather than issuing overdrafts automatically. To qualify, you will usually need to:
How does a business overdraft compare to other finance options?
A business overdraft suits small, short term cash flow gaps, while a business loan or revolving credit facility tends to suit larger or more predictable funding needs. The table below sets out the key differences.
Feature | Business overdraft | Business loan | Revolving credit facility |
|---|---|---|---|
How you access funds | Draw down as needed from your bank account | Receive a lump sum upfront | Draw down and repay repeatedly from a pre approved limit |
Repayment | Flexible, but repayable on demand by the bank | Fixed schedule over an agreed term | Flexible, agreed for a fixed term, typically one to three years |
Interest charged on | The amount drawn down | The full loan amount | The amount drawn down |
Typical limit | Smaller, tied to your account and credit score | Larger, tied to your business plan and financials | Often around one month's turnover, can be higher than an overdraft |
Best suited to | Short term, unpredictable cash flow gaps | Larger, planned investment or expansion | Recurring working capital needs, like stock or payroll |
If your business needs a bigger facility or more certainty over how long it will last, a revolving credit facility or a business loan may suit you better than an overdraft.
Is overdraft interest tax deductible for UK businesses?
Interest paid on a business overdraft is generally treated as a deductible business expense for UK tax purposes, provided the borrowing is used for business purposes rather than personal spending. Arrangement fees are usually deductible too. As tax treatment depends on your specific circumstances, it is worth checking with your accountant before you file.
Which businesses should consider a business overdraft?
A business overdraft works well if you need a small, flexible buffer to smooth out short term cash flow, such as covering a late payment from a customer or a seasonal dip in trade. It is less suited to funding growth plans, large purchases, or any cost you cannot repay quickly if the bank reduces the facility. If that sounds like your situation, a business loan or revolving credit facility is usually the safer route.
Compare business overdraft options with Capitalise
If you are weighing up a business overdraft against other ways to manage your cash flow, we can help you compare options from our panel of more than 130 lenders in one place. Apply for a business overdraft through Capitalise, and a funding specialist will talk you through the rates and terms on offer so you can pick the facility that actually fits your cash flow, not just the first one you are offered.
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