Overdraft vs term loan for a cash gap

2 min read

On-demand vs fixedHow the money behaves

Repayable on demandOverdraft risk

Set termLoan gives certainty

How each covers the gap

An overdraft lets your business account go below zero up to an agreed limit. It is the most flexible option for small, unpredictable dips — you use exactly what you need for exactly as long as you need it, and interest runs only on the overdrawn amount. A term loan is a deliberate sum, paid in and repaid on a schedule, better suited to a larger or more defined gap you can plan around.

For a £2,000 wobble that clears in a fortnight, an overdraft is neat. For a £40,000 gap that will take eight months to close, a term loan gives you the amount and the runway; an overdraft of that size, if you could get one, could be pulled at any time.

The catch with overdrafts

Two things make overdrafts less reliable than they look. First, most are repayable on demand — the bank can reduce or withdraw the limit with little notice, often precisely when your cash is tight. Second, arranged business overdrafts have become harder to obtain and more expensive since many banks scaled back the product; unauthorised overdraft rates can be punishing. A term loan cannot be recalled on a whim as long as you keep to the agreement, which is why many directors treat overdrafts as a top-up rather than a foundation. See our overdraft alternatives guide.

Cost comparison

	Overdraft	Term loan
Interest	On the overdrawn balance, daily	On the advance, over the term
Flexibility	Very high for small dips	Fixed sum and schedule
Certainty	Low — repayable on demand	High — can't be recalled
Fees	Arrangement + often annual review	One-off arrangement

Compare the true cost in pounds with our overdraft vs loan cost calculator.

Where Credicorp fits

If you want the flexibility of an overdraft without the recall risk, a Credicorp Flex revolving line lets you draw and repay while giving you an agreed facility that is not pulled on a whim. For a defined gap, a fixed-term business loan gives certainty. Both are lent to the company with no personal guarantee — register to apply. Educational content, not financial advice.

Frequently asked questions

Can my bank cancel my overdraft?

Usually yes. Most business overdrafts are repayable on demand, meaning the bank can reduce or withdraw the limit with little notice, sometimes when your cash is already tight. A term loan or an agreed revolving facility cannot be recalled arbitrarily as long as you keep to the agreement, which makes them more dependable for anything beyond a small dip.

Is an overdraft cheaper than a loan?

For very small, short dips an overdraft can be cheaper because interest runs only on the overdrawn amount for the days you use it. For a larger or longer gap a term loan is usually cheaper and far more certain, since overdraft rates and review fees add up and the limit can be withdrawn.

Why are business overdrafts harder to get now?

Many banks have scaled back arranged business overdrafts, tightened limits and raised pricing. That has pushed companies towards revolving credit facilities and short-term loans, which offer similar flexibility with more certainty of continued access.