Overdraft vs business loan: which fits the need

How each works

A business overdraft lets you dip below zero on your account up to a limit, paying interest only on what you use — ideal for unpredictable, short-term swings. A term loan advances a fixed sum repaid over a set term, suited to a planned, one-off need. They are tools for different jobs.

Cost and flexibility

An overdraft is flexible but often carries a higher rate and can be withdrawn by the bank. A loan gives certainty — a fixed schedule and, often, a fixed rate — usually at a lower cost for a defined amount. For a known need, the loan's predictability is usually cheaper.

When to use an overdraft

Reach for an overdraft when your cash swings unpredictably week to week and you need a small, flexible cushion you dip into and clear repeatedly. Paying interest only on what you use suits that pattern well.

When to use a loan

Use a term loan for a planned purchase, an order to fund, or a gap with a clear size and end — where a fixed sum and schedule fit. It is cheaper and steadier than running a large overdraft continuously. See working-capital finance.

Cost the loan option

Use the calculator to compare the cost of a loan against running an overdraft for the same need.

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