What is a business overdraft?

A business overdraft is a form of credit attached to a business’s current account. The provider agrees to a limit, and the business can dip below zero up to that limit, repaying as money comes in. Unlike a business loan, you do not draw a fixed sum upfront, and you do not repay on a fixed schedule. You only pay interest on the amount you actually use on any given day, although most providers also charge an annual arrangement or renewal fee on the limit itself.

How does a business overdraft work?

When the provider approves your application, they set an agreed limit, an interest rate (usually a margin above the Bank of England Base Rate) and any fees. From that point, the limit sits in the background. If you drop below zero by an amount within the limit, you have what is known as ‘arranged’ borrowing. If you exceed it you are in ‘unarranged’ territory, which carries higher charges and can, over time, trigger negative reporting to credit reference agencies. 

Overdrafts are periodically reviewed and the provider can choose to renew at the same level, adjust the limit or notice to withdraw the facility. Overdrafts are intended to be a short term borrowing solution and if your account activity indicates there is financial strain or misuse of the overdraft, then the overdraft will be adjusted accordingly to mitigate this.

What does ‘repayable on demand’ mean for your business?

Business overdrafts are traditionally structured as borrower-lender agreements, or ‘demand facility’ that the lender can recall on demand at any time, a position that remains unchanged by recent regulatory shifts. Confusion often arises regarding the rules introduced on 28 April 2026 under the Payment Services and Payment Accounts Regulations. These rules mandate that banks give at least 90 days’ written notice and a clear explanation before terminating a customer’s payment account. If a bank closes a business account entirely, any associated overdraft is naturally wound down over that 90-day period. However, if the bank chooses to keep the payment account open, they are still legally permitted to withdraw or reduce the overdraft facility immediately without triggering the 90-day account termination rules. 

You can challenge a decision in the first instance through the bank’s complaints process and then through the Financial Ombudsman Service if you believe it is unfair.

What does a business overdraft actually cost?

Business overdrafts have a layered cost structure, and the headline interest rate isn’t the only number that matters. The cost usually has three or four components working together:

• Interest on the daily balance, normally a margin above the Bank of England Bank Rate, sometimes adjusting based on a tiered rate structure. 
• An arrangement fee when the facility is first set up (often a percentage of the agreed limit, with a minimum charge)
• An annual renewal fee that applies whether or not you use the overdraft
• Unarranged borrowing fees and returned payment charges if you go beyond the agreed limit

The FCA’s overdraft pricing reforms in PS19/16 only apply to personal current accounts, not to business ones, so the way charges are presented differs from one business provider to the next. That makes a direct comparison harder than it is for loans. Looking at the total annual cost (interest plus arrangement and renewal fees plus any minimum charges) is more useful than focusing on the rate alone, particularly if the limit is small or the facility is rarely used.

How does a business overdraft affect your credit score?

Conduct on a business overdraft feeds back to the UK credit reference agencies, principally Experian and Equifax, which combine that data with public records from Companies House to build the business credit profile. Staying within the limit and clearing the balance regularly is generally read as a positive signal of cash flow management. Going beyond the limit, missing payments or sitting at the limit for long stretches might push the score downwards.

For sole traders and partnerships, conduct on a business overdraft also influences the personal credit file because the borrowing sits in the name of the individual rather than a separate legal entity. Limited company directors can be asked for a personal guarantee on a business overdraft, which means a default can affect their personal credit standing as well.

Business overdraft vs business loan: which is right for you?

The two products solve different problems. An overdraft is a short-term flex tool that covers uneven cash flow, such as the gap between paying suppliers and being paid by customers. A business loan is a fixed sum repaid in instalments over a defined term, suited to a planned investment such as equipment, premises or growth.

If you are using the overdraft most months and rarely returning to a positive balance, a loan might work out cheaper and more predictable, while the overdraft is designed to work as a buffer for genuine short-term gaps. 

How do I get a business bank account with an overdraft?

If overdrafts facilities are available, providers usually expect you to open the business current account first and apply for the overdraft as a separate decision, although some assess the overdraft alongside the application.

• You will normally need identification for the directors or owners
• Basic information about the business under the Money Laundering Regulations 2017
• A record of trading (often three to twelve months of bank statements or filed accounts) and evidence of the cashflow pattern the overdraft is meant to cover
• A personal guarantee from one or more directors is standard for limited companies

If the business is newly trading or has limited filed accounts, providers tend to either decline an overdraft or offer a small limit, which they review once more trading data is available.

Which business bank accounts include an overdraft facility?

Not all providers offer overdrafts, it depends if they operate with a full banking licence or as an Electronic Money Institute (EMI) under the Financial Conduct Authority (FCA). EMI’s do not provide credit facilities directly themselves, though some do under partnerships with 3rd parties.

The right account depends on how you use cash, whether you need branch access, the size of the buffer you realistically need and how the cost of the overdraft compares with alternatives such as invoice finance or a small business loan.

Which banks offer an overdraft?