What is a business bank overdraft and should I use one?

A business bank overdraft is like a cash safety net for your business. It’s a type of short-term flexible loan up to an agreed limit that you can dip into when your bank balance drops below zero. It can provide cash to help you survive a short term cash-flow problem or deal with an unexpected expense.

In this guide we explain how business bank overdrafts work and the pros and cons of using one. We also answer common questions like “how much can I borrow?” and “can my bank remove an overdraft with no notice?”

Table of Contents

What is a business bank overdraft?

Most business bank accounts automatically offer an overdraft facility. It’s a bit like a short term, fluctuating business loan up to an agreed limit. Your business uses this overdraft whenever your bank balance drops below zero.

Your business can borrow money from the bank up to an agreed overdraft limit. The amount borrowed is deducted from your bank account balance so that your cash balance goes into negative figures.

How does a business bank overdraft work?

Business bank overdrafts work just like an overdraft on a personal bank account. Your business will have an agreed overdraft limit. This limit is usually agreed when you open your business bank account and provides a safety net to help your business deal with any short-term cash-flow issues. Your bank may agree to adjust your overdraft limit, depending on its lending criteria and your circumstances.

A business bank overdraft works like a flexible unsecured loan that fluctuates depending on receipts and payments from your bank account. Interest on business bank overdrafts is usually calculated every day depending on the bank balance.

Some banks offer secured bank overdrafts for larger business overdraft limits. These may be secured on an asset or a property, which will be at risk if your business can’t repay its overdraft.

How is interest calculated on a business bank overdraft?

Interest rates for business bank overdraft are often relatively expensive compared to other types of business finance. This is because an overdraft is usually a flexible and unsecured lending facility.

Lenders calculate overdraft interest owed on a daily basis, depending on your daily bank balance. The amount of interest due is based on the bank’s effective annual rate (EPR), often based on the Bank of England base rate. This is slightly more expensive than an annual percentage rate as interest is cumulative and will build up throughout the year.

Banks often charge higher interest rates for smaller overdraft facilities compared with larger loans. For example, they may charge around 10% above the Bank of England base rate per annum for an overdraft of up to £5,000 and 8% above the Bank of England base rate per annum for an overdraft of over £20,000.

Banks may not offer their advertised EPR to all customers. If your business is considered a higher lending risk then you may be offered a higher interest rate on your overdraft facility.

What are the fees on a business bank overdraft?

Overdraft fees vary significantly depending on the bank, the level of overdraft and the size of your business. Banks often charge monthly fees for smaller overdrafts of up to £5,000 whereas they may calculate fees percentage of the overdraft used for larger overdrafts of up to £25,000.

For example, a bank might charge £12 per month for a small overdraft facility of up to £5,000 and a 1.99% annual fee for an overdraft between £5,000-£25,000. Fees for larger overdraft facilities of over £25,000 are usually lower but may attract an arrangement fee.

Some banks charge an additional arrangement fee for arranging a new overdraft or changing your overdraft limit.

What can I use a business bank overdraft for?

Your business can use a bank overdraft to help with any short-term cash-flow needs. They are particularly useful for the following:

  • Short term cash-flow issues - you may need to dip into your bank overdraft to pay for stock, pay a supplier or cover your cash needs while you are waiting for an invoice to be paid.
  • Unexpected expenses - businesses often use their bank overdraft to pay unexpected bills.
  • Seasonal fluctuations in business - your business may need to bridge a gap between buying stock and making sales. If this is a regular issue then alternative finance such as a working capital loan might be more suitable. This is because banks are allowed to withdraw an overdraft facility with little or no notice.

What are the pros & cons of using a business bank overdraft ?

Here are the main pros and cons of using a business bank overdraft.


  • Safety net - business bank overdrafts provide a financial safety net, allowing you to make business decisions without constantly worrying about going overdrawn. You still need to be aware of your bank balance and make sure you are not getting too close to your overdraft limit.
  • Quick - your business can use its overdraft facility at any time, as long as you don’t go over the agreed limit.
  • Unsecured - bank overdrafts are not usually secured on any assets or property so they will not be at risk.
  • Flexible - interest is calculated every day so you will only pay interest on the amount of cash you are currently borrowing. This is great if you normally have a positive bank balance but occasionally dip into your overdraft.
  • Can apply for bigger overdraft - you can ask your bank to review your overdraft facility to see if you are eligible for an increased limit. The process is often very quick if you are an existing customer.
  • Short-term - your business won’t be committed to long-term borrowing and you can repay your bank overdraft with no penalties.


  • Expensive - interest rates on business bank overdrafts are relatively high. This is because they are flexible and usually unsecured.
  • Precarious - banks can suddenly withdraw or reduce your business overdraft facility with little or no notice. In reality banks usually give at least a few weeks notice before they withdraw an overdraft facility.
  • Affects credit score - If your business breaches its agreed overdraft limit then this may affect your credit score and ability to apply for other finance.

Alternatives to using a bank overdraft

If your business needs to borrow cash regularly or you need a significant amount of cash then alternative business finance may be more suitable than using a business bank overdraft.

Here are some other types of business finance to consider:

  • Asset financing - this is a business loan to buy or hire assets, usually secured on those assets.
  • Invoice financing - lenders advance cash based on the value of your outstanding customer invoices. The loan is usually repaid once cash comes in from customers.
  • Working capital loan - this is a flexible loan arrangement used to provide cash to cover short-term borrowing needs.
  • Small business loan - a simple small business loan works like a personal loan with an agreed interest rate and repayment schedule.
  • Bridging loan - this is often used to bridge a gap between buying one building and selling another, although it can also be used for other short term borrowing needs.

How do I apply for or increase my business bank overdraft ?

Banks often offer an overdraft automatically when you set up a business bank account. You can also ask your bank to review and increase your business overdraft facility if you are an established customer.

Lenders may ask for the following information when assessing an overdraft application:

  • Personal details of your business directors and signatories including home addresses.
  • Business information including company registration number, if you’re a limited company
  • Financial information including year end accounts and cash-flow forecasts

If the bank has concerns about you repaying the overdraft, or you’re asking for a large overdraft facility, they may offer a secured overdraft. In this case, the lender will ask for details of the assets being offered for security.

Where can I get a business bank overdraft?

Most banks offer business bank overdrafts. It is worth shopping around because terms and conditions vary widely. Here are some providers:

Frequently asked questions

The level of overdraft facility offered to your business will depend on your turnover, credit score and your bank’s other lending criteria. Overdrafts facilities for small business usually start at around £5,000. There may be a more complex application process if you want an overdraft of over £25,000.

Banks may periodically review your level of overdraft. They will look at how you use your overdraft facility and any changes in their lending criteria.

Banks can remove your overdraft facility with no notice, although they will probably write to warn you a few weeks before a change.

You may be able to switch business bank account while yours is overdrawn. The new bank will assess your eligibility based on their lending criteria and may not offer the same level of overdraft as your old account.

Some simple business bank accounts don’t offer a business bank overdraft. These simple business bank accounts are designed for very small businesses. They often don’t charge fees so the features are more limited.

If you occasionally need to dip into a business bank overdraft then it might be time to open a different bank account.

If you go over your business bank account overdraft limit, then this is called an unauthorised overdraft. You may incur a penalty charge and will probably owe an increased interest rate on the extra borrowing.

If your business regularly goes over its agreed overdraft limit then your bank may withdraw or reduce your existing bank overdraft facility. It may also affect your credit rating and ability to apply for other finance.