What is a business overdraft?
A business overdraft is an agreed limit on a company’s current account below zero. The bank lets the account go overdrawn up to that limit, the business draws and repays as its receipts and payments fall, and interest is charged on whatever the overdrawn balance is each day. Nothing is borrowed until the account goes below zero, and nothing is owed on the part of the limit that is not used.
The feature that defines it in law is that it is repayable on demand. The bank can ask for the whole balance back at any time, reduce the limit or withdraw it, without a default on the borrower’s part, and the facility letter says so. An overdraft is arranged with the bank that holds the account, which is why it is one of the few forms of business borrowing a broker does not arrange.
How an overdraft is priced
Three charges, each stated in the facility letter. An arrangement or renewal fee, charged when the limit is set and again at each annual review. Interest on the overdrawn balance, calculated daily on the amount overdrawn and charged to the account monthly or quarterly, at a margin over the bank’s base rate or a published reference rate. And on some facilities a fee on the unused part of the limit. Each bank publishes its own tariff; no figure is given here, because the rate on any one account is the bank’s to state.
What the bank asks for
The filed accounts, management figures and a cash flow forecast showing the peak need and when the account returns to credit. For a limited company, commonly a debenture over the company’s assets and a personal guarantee from the directors; the debenture is registered at Companies House within 21 days under Part 25 of the Companies Act 2006, and it is the charge an invoice financier or a term lender finds on the register later. The limit is reviewed each year, and the bank can reduce it at the review or at any time between.
What an overdraft is for
The gap between paying out and being paid: wages on the 28th against invoices settled on the 30th, stock bought before the season it sells in, VAT on the quarter day. The account swings into the overdraft and back into credit within weeks. A balance that sits at the limit month after month is no longer a swing; it is a core borrowing that happens to be repayable on demand, and the bank’s review will read it that way.
What it is not
It is not a loan. A loan is drawn once and repaid in instalments over a term, and the lender cannot call it in early unless the borrower defaults. It is not a revolving credit facility, which is a committed limit from a lender other than the bank, drawn and repaid in the same way but for a fixed period that the lender cannot cut short without cause. And it is not invoice finance, which advances against specific invoices rather than against the account. Each has its own price and its own terms; which structure a business uses is its own decision, and the business overdraft alternatives page sets the structures side by side.
We have access to a range of UK commercial finance lenders through our principal, White Rose Finance Group Limited. We work with UK limited companies and LLPs only, for business and commercial purposes. Enquiring does not affect your credit score. If you apply to a lender, it runs its own credit search, which may be recorded on your file.
Frequently asked questions
Can the bank withdraw an overdraft without warning?
Yes. Repayable on demand means the bank can call for the balance, reduce the limit or withdraw the facility at any time, and the facility letter sets out that right. In practice a bank gives notice, but it is not obliged to wait for a default.
Does an unused overdraft cost anything?
The arrangement or renewal fee is charged whether or not the limit is used, and some banks charge a fee on the unused portion. Interest is charged only on the overdrawn balance.
Can CapExpand arrange a business overdraft?
No. An overdraft is a facility on the current account and is arranged with the bank that holds it. We arrange the structures that sit alongside or replace one: revolving credit facilities, term loans, invoice finance and asset finance, each from a lender that publishes its own criteria.
Is a business overdraft secured?
Often. For a limited company the bank commonly takes a debenture and personal guarantees; a small limit may be unsecured on the strength of the account. The facility letter states what security is held.
Is CapExpand regulated?
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. If you have a complaint, our complaints page explains how it is handled.
How is CapExpand paid?
We will receive commission from lenders. On some cases we also charge a fee, which we set out in writing and agree with you before you proceed.
More funding questions answered
- What is working capital?Current assets less current liabilities: the working capital cycle in days, how to read the figure from the accounts, and where finance fits.
- What is a term loan?A fixed sum repaid with interest in instalments over an agreed period: the parts of a term loan, amortisation, covenants and events of default.
- What is an arrangement fee?The one-off charge a lender makes for setting up a facility, deducted, paid or added to the loan, and the other fees that sit beside it.
- What is an early repayment charge?The sum a lender charges if a loan is repaid before a date in the agreement, how it is calculated, and how it differs from an exit fee and a minimum interest period.
- What is a director’s loan?Money passing between a company and a director outside salary, dividends and expenses, in either direction: what the Companies Act requires and how a lender reads the balance.
- What do lenders look for in a business loan application?The six things a lender reads before it decides: affordability, trading time, the credit files, the purpose, security or the guarantee, and the conduct of the bank account.
If the overdraft is being reduced
The limit, the balance the account sits at and what the money is doing are enough for us to check the case against lenders’ published criteria before anything is sent anywhere.
Sources
Checked 26 October 2026. This page explains how a bank overdraft works in general terms; each bank publishes its own tariff and terms, and nothing on this page is a quote.
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. We do not provide financial advice.