Finance Types

Bank Overdrafts

Bank Overdrafts

An overdraft is a borrowing facility attached to your business bank account that is set at an agreed limit you agree with your bank. It allows you to temporarily spend more than you have in your account to cover short-term financing needs.

It can be drawn on at any time and is most useful for day-to-day expenses as it can help you to manage your business’ cashflow more flexibly.

Overdrafts should not be used as a long-term source of finance. They are most useful as a cashflow-management device, to help absorb unexpected expenses, seasonal variations in income and expenses, or hitches in your supply chain. Other types of finance are usually more appropriate for longer-term funding or substantial purchases – for example, an overdraft is likely to cost more than a loan for capital expenditure.

You need to apply to your bank and agree an overdraft limit with them. You will usually be charged interest on any money you use and may also have to pay a fee for the facility.

Overdrafts are usually quick to arrange and although the interest rate might be higher than products such as loans, overdrafts can work out to be cheaper overall, as you only borrow what you need at the time (a business loan comes with fixed repayments and interest, but with a business overdraft you will only pay interest on the amount by which you’re overdrawn).

You can normally pay off your overdraft earlier than expected with no charges for doing so. Many businesses appreciate this flexibility but it is always worth checking whether an overdraft is the best option depending on your business’ circumstances and what you need to use it for.

Remember, you may be charged additional fees and interest if you exceed your overdraft limit and your bank can reduce your overdraft limit or ask for the money back at any time.

Interest rates are usually variable and can be a percentage over the base rate set by the Bank of England or at a lender’s standard rate for its overdraft product which can be varied by the lender.

You can only get an overdraft from the bank you hold your business current account with. You may be able to appeal here if you are refused an overdraft. The following banks are part of the appeals process: Agricultural Mortgage Company, Barclays, HSBC, Lloyds Bank, Bank of Scotland, RBS, NatWest, Santander, Ulster Bank, Bank of Ireland, Danske Bank, Virgin Money, Yorkshire Bank and AIB.