How do business overdrafts work?

A business overdraft works by letting you spend more than the balance in your business current account, up to a limit your bank agrees in advance, and you only pay interest on the amount you actually draw down. Once you repay any of it, that portion of your limit becomes available again straight away, without you needing to reapply.

This guide walks through exactly how a business overdraft works in practice, from how interest is calculated day to day, to what it costs, how to qualify, and how to decide with confidence whether it's the right fit for your business.

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 straight away, without you needing to reapply.

In practice, this means your bank agrees to a limit upfront, and from then on you simply spend as normal from your business account. If a payment takes your balance below zero, up to your agreed limit, you're using your overdraft, and interest starts accruing on that amount from that day. As soon as money comes back into the account, whether from a customer payment or a transfer, it automatically reduces what you owe, and the full limit becomes available to draw on again. There's no separate application each time you dip into it, which makes it a useful tool for smoothing out day to day cash flow gaps rather than funding a single planned cost.

What is the difference between an arranged and an unarranged overdraft?

Most banks offer two versions of a business overdraft, and the difference matters because of how much more one costs than the other. An arranged overdraft is agreed with your bank in advance, with a set limit, an arrangement fee and an agreed interest rate. As long as you stay within that limit, you know exactly what borrowing will cost before you use it.

An unarranged overdraft happens when you spend beyond your agreed limit, or when you have no arrangement in place at all. Banks charge a notably higher rate for unarranged borrowing, on top of the risk of returned payments if a direct debit or standing order can't be covered. Relying on an unarranged overdraft regularly can also affect your business credit score, so it's worth treating it as a last resort rather than a backup plan.

How is interest calculated on a business overdraft?

Interest on a business overdraft is calculated daily on your outstanding drawn balance, then usually charged to your account monthly. Because it's based on the balance you actually owe each day, the total cost depends on how much you draw and for how long, not on your full agreed limit. Say your business draws down £5,000 from an overdraft at 15% EAR and repays it in full after 20 days. The interest works out at roughly £5,000 x 15% x (20 ÷ 365), which comes to about £41. If the same £5,000 is drawn for 90 days instead, the interest rises to around £185, since the cost is directly tied to how long the balance is outstanding, not the size of your overall limit. This is why clearing your balance as soon as you can is the most effective way to keep the cost of a business overdraft down.

How much does a business overdraft cost?

A business overdraft typically costs an arrangement fee plus variable interest on whatever you draw down, with a much higher rate if you go over your limit. The table below shows the ranges to expect from UK banks in 2026, based on currently published rates across the major high street providers.

With the Bank of England base rate at 3.75% as of August 2026, representative rates for an arranged business overdraft across the major banks currently sit somewhere between 15% and 20% EAR. Your actual rate depends on your bank, your credit profile and how established your business is, so it's worth comparing more than one offer rather than assuming the first rate you're quoted is the best available. A stronger business credit score usually helps you access a better rate.

Do you need a personal guarantee or security for a business overdraft?

Whether you need to give a personal guarantee or extra security depends on the bank and how your business is set up. If you run a limited company, some banks will ask each director to personally guarantee the overdraft before it's approved, which means you could be personally liable for the debt if the business can't repay it. Other banks assess this case by case, based on your credit profile and how much you're asking to borrow, rather than asking for a guarantee as standard. It's worth asking your bank directly what they'll require before you apply, since this varies more between banks than many business owners expect.

How much can you borrow with a business overdraft?

Most banks set business overdraft limits based on your turnover, trading history and credit profile, rather than offering a single standard amount. Typical limits range from around £500 up to £50,000 with most high street banks, though some providers will go considerably higher for larger, more established businesses. A stronger business credit score and a longer track record of managing your account well both tend to unlock a higher limit, while a newer business or a weaker credit profile usually means a smaller starting limit that can grow over time as your bank gets to know how you manage the account.

Can your bank reduce or withdraw your overdraft?

A business overdraft is usually described as repayable on demand, meaning your bank can review, reduce or withdraw the facility at short notice, even if that disrupts your cash flow. Most banks review the facility periodically, often once a year, checking how you've used it and whether your business's financial position has changed. If the review raises concerns, or your account activity shows signs of financial difficulty, the bank can act quickly, which is the main risk to weigh up against the overdraft's flexibility. Some banks offer support such as a repayment plan or a gradually reducing limit if you're struggling, rather than withdrawing the facility outright, so it's worth talking to your bank early if you think you'll struggle to repay.

What are the advantages and disadvantages of a business overdraft?

The main advantage of a business overdraft is flexibility. You only pay interest on what you draw, there's no fixed repayment schedule, and funds are available instantly once your facility is set up. The main drawbacks are that rates are variable, fees can apply whether or not you use the facility, and your bank can reduce or withdraw it at short notice. For the complete list of pros and cons, including how a business overdraft compares on risk and cost, read our full breakdown of the pros and cons of a business overdraft.

How does a business overdraft compare to a business loan or revolving credit facility?

A business overdraft suits small, short term, unpredictable 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 how they compare.

If your business needs a higher limit with more certainty that it won't be reduced mid term, a revolving credit facility is usually the better fit. Read our full comparison of a revolving credit facility versus a business overdraft for a detailed breakdown of costs, limits and how to choose between them.

Which businesses should consider a business overdraft?

A business overdraft works best if you need a small, flexible buffer to smooth out a short term cash flow gap, such as a late paying customer or a seasonal dip in trade. It's less suited to funding growth, a large purchase, or any cost you couldn't repay quickly if your bank reduced the facility. If you need a bigger, fixed amount for a planned cost instead, a business loan is usually a better fit, since the amount, rate and term are agreed upfront and can't be pulled at short notice.

Does using a business overdraft affect your credit score?

Using your business overdraft as agreed, and staying within your limit, doesn't usually harm your business credit score, and some lenders view a well managed overdraft positively as evidence you can handle credit responsibly. Regularly exceeding your limit, relying on an unarranged overdraft, or missing a repayment can affect your business credit score and make it harder to access other finance later, so it's worth tracking your usage rather than letting it run unchecked.

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