2 min read
How a business overdraft works
An overdraft facility permits a company to draw its current account into a negative balance up to a pre-agreed limit. Interest accrues only on the amount drawn and for the days it is outstanding, making it cheaper than term borrowing when usage is intermittent.
Most business overdrafts are repayable on demand, meaning the lender can withdraw the facility at short notice. This contrasts with a fixed-term loan, where the schedule is contractually locked for the agreed period.
How lenders assess overdraft applications
Lenders review current-account turnover, the regularity of credit entries, and whether the account has previously been overdrawn. For limited companies, two to three years of filed accounts or management accounts are typically requested alongside a current bank statement run.
Where the overdraft is to bridge a specific seasonal gap, providing a cash-flow forecast that illustrates the timing of income and expenditure strengthens the application. A personal guarantee from directors is often required, particularly for smaller limits.
When an overdraft may not be the right tool
Overdrafts suit short-term, recurring cash-flow fluctuations. They are less suited to funding capital purchases, long-term growth, or situations where the business needs certainty of funds for an extended period.
For predictable working-capital gaps tied to debtor cycles, invoice finance or a revolving credit facility may provide more headroom. For asset acquisition, a secured loan or asset finance is generally more appropriate.
Costs and risks to consider
Beyond the interest rate, overdrafts typically carry an arrangement fee and sometimes an annual renewal charge. Unauthorised overdraft usage — drawing beyond the agreed limit — incurs penalty fees and can damage the company's credit profile with the provider.
Because overdrafts are on-demand, a business that relies heavily on an overdraft for structural funding is exposed if the lender withdraws or reduces the limit. Illustrative cost comparisons here are not a quote.
Frequently asked questions
Can a limited company get a business overdraft without a personal guarantee?
Some lenders offer unsupported overdrafts to established companies with strong trading histories and healthy balances, but personal guarantees are standard for most SME facilities. The requirement depends on the lender, the limit size, and the company's credit profile.
Is a business overdraft the same as a revolving credit facility?
They operate similarly — both are drawn and repaid flexibly — but a revolving credit facility (RCF) is a separate contractual arrangement, often with a fixed commitment period, whereas an overdraft is attached to the current account and is repayable on demand.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.