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What is a business overdraft - a guide for businesses

Capitalise Jun 29, 2023

As a business owner, you may have come across the term business overdraft while exploring banking options for your company. But, you might be wondering what exactly is a business overdraft, and how it can benefit your business. 
Whether you're a small startup or an established enterprise, understanding a business overdraft can help you manage cashflow effectively.

Business overdraft definition 

A business overdraft is a form of short-term borrowing that allows businesses to withdraw more money from their bank account than the actual balance. It acts as a safety net for businesses to manage their cashflow effectively, providing immediate access to funds when needed. It's typically granted by a bank and subject to certain terms and conditions.

With a business overdraft, you can spend more money than your current bank balance, up to a predetermined limit. This limit is set by the bank based on the creditworthiness and financial health of the business. 

Top tip: A good business credit score shows banks and lenders that your business is financially healthy and creditworthy. With a good credit score you could access a larger limit on your business overdraft.
Improve your business credit score to get better terms on your business overdraft.

A business overdraft can be used to cover various expenses such as paying suppliers, meeting payroll, or managing unexpected financial obligations.

Unlike traditional loans, where you receive a lump sum and pay interest on the entire amount, with a business overdraft, you are only charged interest on the amount you use. This flexibility makes it a good option for businesses with fluctuating cashflow or seasonal businesses that face busy and slower periods. 

Key Features of a Business Overdraft

  • Flexibility

Business overdrafts offer businesses the freedom to borrow and repay funds as and when needed, as long as its within the approved limit.

  • Interest payments

Interest is only charged on the amount of the business overdraft used, not the entire approved limit. This can help minimise interest costs when compared to other forms of borrowing.

  • Quick access to funds

A business overdraft provides immediate access to funds, making it ideal for managing short-term cash flow gaps.

  • Renewable facility 

Depending on the terms agreed upon with the bank, a business overdraft facility can be renewable, allowing businesses to access funds even after the initial repayment.


Applying for a Business Overdraft

To apply for a business overdraft, you will typically need to provide the following information:

  • Latest set of filed company accounts 
  • 6 months business bank statements


Once you have the above ready, you can apply for a business overdraft and compare overdraft lenders from your Capitalise account.  

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