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Businesses Funding Business Overdraft

A flexible way to manage cash flow

Business overdrafts 

Whether you're covering a temporary gap in cash flow, waiting for a payment to come through, or managing seasonal fluctuations, a business overdraft can be helpful to keep your business on track.

What is a business overdraft?

Running a business means juggling a lot of financial decisions, and sometimes you need a little extra cash to keep things running smoothly. A business overdraft can provide that quick support, offering access to funds when you need it most.

A business overdraft allows you to borrow money short term by withdrawing more from your business bank account than you currently have. It acts as a financial safety net, helping you manage your cash flow by providing immediate access to funds when needed.

Your bank will set a predetermined limit that you can borrow, depending on your business creditworthiness and its financial health. With this added flexibility, you can cover expenses even when your balance is low.

What are the benefits of a business overdraft?

Benefit from flexible borrowing

With a business overdraft, you borrow and repay funds as needed, as long as it’s within the approved limit. This gives you the flexibility to use the funds when you need them most.

Access funds quickly

Setting up an overdraft is usually a fast process, which is a real advantage when you need cash fast, for example to cover an upcoming bill.

Pay interest only on what you use

You only pay interest on the money you actually use, not the full limit. This means you can manage your interest expenditures.

How does a business overdraft work?

When you apply for a business overdraft, your bank will assess your financial health, including your existing revenue and business credit score. Based on this, they will determine your eligibility and set your credit limit.

Once approved, your overdraft acts as an extension of your existing balance. You can draw funds from it just like any other balance in your account. 

What fees are involved with a business overdraft?

Business overdrafts often come with several fees, depending on your bank's terms. These include:

  • A one-time fee charged by some banks to arrange the overdraft.
  • Interest charged on the borrowed amount , which is typically calculated daily or monthly.
  • Regular monthly or annual fees, regardless of whether you use the overdraft.
  • Higher unarranged overdraft fees, if you go into overdraft without prior approval or exceed your limit.
  • Penalty charges or higher interest rates if you fail to repay on time.

Remember to review your bank’s terms to fully understand all potential fees.

What are the alternatives to a business overdraft?

While overdrafts are useful for short term borrowing, they might not be the best choice for larger or long-term funding needs. Here are some alternatives that could better suit different business needs:

  • Revolving credit facilities: Working similar to an overdraft, this option lets you borrow as needed. It can offer larger amounts than an overdraft and often has lower fees.
  • Merchant cash advances: A great option for businesses that take card payments, with flexible repayments that adapt to your business’ varying sales.
  • Invoice finance: A quick way to access funds by using outstanding invoices as collateral, perfect for businesses needing fast cash flow.
  • Short term loans: Ideal for businesses needing one-time funding for specific purposes, with predictable monthly repayments.
  • Long term loans: Best for larger loan amounts needed for bigger projects, like business expansion or when you need to keep the monthly repayment low.

Is an overdraft right for your business?

A business overdraft can be a useful tool for managing short term cash flow challenges and seizing short term opportunities. However, there are many other options available that may better suit your specific business needs.

If you're unsure which option is right for you, our dedicated funding specialists are here to help. With over 100 UK lenders on our platform, with Capitalise, you can search the entire marketplace and receive the right support to find the best funding solution for your business. Contact us today to explore your options. 

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frequently asked questions

Capitalise is an FCA regulated platform dedicated to UK businesses. Our mission is to help businesses to take control of their financial health. We support business owners by providing easy way to access over 100 lenders and compare their loan products. Our advanced platform makes intelligent matches and ranks lenders, based on their past successes, to help businesses select the best funding solution.

Capitalise also enables businesses to check their own Experian business credit score to better understand their financial health. Plus businesses can check the credit profiles of the companies they work with to reduce risk.

Many banks offer overdrafts on business accounts. Approval will depend on factors like your business’s financial health, credit history, and the nature of your account. You'll need to apply and meet your bank's criteria, which may be based on factors like your business’ revenue.

There are a number of advantages to using a business overdraft: 

  • You can borrow as needed, making them a great option for covering short term cash flow gaps.
  • They are easy to set up and allow quick access to funds when you need them.
  • You only pay interest on the amount you borrow, not the entire limit, which can make them more cost-effective than loans.
  • There are no fixed monthly repayments, giving you the flexibility to manage your business's finances.

While business overdrafts can be useful, there are a few potential disadvantages to consider:

  • Overdrafts can come with high interest rates.
  • If you exceed your approved limit, additional fees may apply.
  • Relying on an overdraft regularly can lead to financial strain if you're not effectively managing your cash flow.
  • If you go into overdraft without prior approval or exceed your limit, you could incur higher fees or interest charges.

It's important to stay on top of repayments and contact your bank if you're having trouble, as they may offer support or restructure the overdraft.

If your business struggles to repay its overdraft, several things can happen. The bank may increase the interest rate on your overdraft, making it more expensive to repay. 

Missing payments or exceeding your limit can also result in extra fees and penalties. Late or missed payments will also likely harm your business’s credit score, making it more difficult to secure finance in future. In severe cases, if you consistently fail to repay, the bank may demand full repayment or even close your account.