Business overdraft: how to get one, what it costs, and what replaces it

A business overdraft is a line of credit on your business current account, arranged with the bank that holds the account. It charges interest only on the amount you are overdrawn, the bank usually charges for setting it up and for renewing it each year, and it can ask for the money back at any time. We do not arrange bank overdrafts; the bank does that with its own customer. What we arrange is the finance that replaces one when the limit is reduced or withdrawn, which is the rest of this page.

When a business overdraft is reduced or comes to an end, the closest like-for-like replacement is a revolving credit facility or flexible credit line: approved once, drawn when needed, repaid and drawn again. The alternatives differ in how they are drawn and repaid, so it helps to know what the overdraft was doing, whether that was absorbing a few days of timing each month, bridging late-paid invoices, or quietly funding growth.

The four products that cover almost every replacement case are compared below, by how each one is drawn and how it is repaid.

How a business overdraft works, and how to get one

The British Business Bank's guidance describes the product plainly. An overdraft is arranged with your bank, online, by phone or in branch, and sits on the business current account. Interest is charged at an annual rate on the overdrawn amount only, the rate varies between banks and can change at any time, and it is generally higher than the rate on a business loan, which is why the Bank calls an overdraft a short-term solution. The limit can be raised or lowered if the bank agrees. You repay as cash flow allows, but the bank can demand repayment at any time, and a late or missed repayment can bring a charge and a mark on the credit report.

Four charges are usual, and the guidance names them: one for setting the facility up, one at renewal, often each year when the facility is reviewed, one for changing the limit, and one for going over it. Ask the bank for all four before agreeing a limit, because the interest rate on its own understates what a facility renewed every year comes to.

If your bank turns an overdraft application down, the Bank Referral Scheme applies: the participating banks must, by law, offer to refer you to a designated finance platform. That is also the point at which the products below become the practical question.

What was the overdraft actually doing?

How the overdraft was used is the useful starting point, because the products below are built around different patterns. An overdraft that dipped negative for 3 or 4 days a month around payroll was doing timing work, which is the pattern a revolving facility is drawn and repaid around. One that sat permanently at its limit was carrying a fixed balance, which is how a term loan is structured.

Pull the last 6 months of bank statements and count: how many days negative, how deep, and whether the balance ever fully cleared. Lenders read that pattern: a balance that clears every month and one that never clears are assessed differently, and the products built around each are set out on this page.

The alternatives, compared

Four products cover almost every overdraft-replacement case for UK businesses. Each is repaid in a different way, and that mechanism, rather than the label, decides whether it does the job the overdraft did.

Why do banks review overdrafts, and does that affect the alternatives?

Banks review overdraft books for portfolio reasons as much as for customer-specific ones, including sector appetite, capital rules and their own lending strategy. A reduced limit is not automatically a verdict on your business, and a lender replacing the facility will usually underwrite on your recent trading, typically the last 3 to 6 months of bank and card statements, rather than on a bank’s internal policy.

It is still worth looking hard at the trigger. If the limit changed after months of hard limit-riding, returned payments or HMRC arrears, fix the underlying pattern first, because a facility layered onto the same pattern recreates it. Our page on what to do when a loan is not approved covers how lenders read those signals.

How fast can a replacement be in place?

Each lender sets its own timing for a replacement facility and states it in its own terms. Statements are usually shared in minutes through open banking. The practical step is to gather them before the overdraft actually disappears, because arranging a replacement while the old facility still runs is calmer than arranging one afterwards.

What a replacement lender asks for

A lender replacing an overdraft reads the account the overdraft sat on, because the pattern in it is the whole of the case.

• Several months of business bank statements or an Open Banking connection, showing how often the account went below zero, how far and whether it cleared.
• The bank’s letter reducing or withdrawing the overdraft, if there is one, and the current limit and balance.
• The last filed accounts and current management figures, with the debtor days, because a business that is paid late is a business whose overdraft was doing the customers’ work.
• A sentence on what the overdraft was used for, since a limit that covered payroll timing and one that funded a permanent balance are replaced by different products.
• Director details for the personal guarantee that is usual on a facility to a limited company.

Which stages are in your hands

Replacing an overdraft is calmer while the old facility still runs. These stages are the business’s to start before the bank’s date arrives.

• Counting the days: Reading the last several months of statements and counting how many days the balance was negative, how deep and whether it ever cleared is the analysis every replacement lender does; doing it first lets the business choose the product rather than be chosen for.
• Starting before the limit goes: A facility arranged while the overdraft is still in place is underwritten on a trading record that shows no returned payments. One arranged after the limit is gone is underwritten on the weeks of strain that followed.
• Tidying the account: Returned direct debits, a gambling transaction or an HMRC payment in arrears are read on every statement. The months before the enquiry are the ones the lender sees.
• Telling the bank: Where the bank holds a debenture, a replacement lender may need a release or a deed of priority. That request is the business’s to make.

What can go wrong

An overdraft replaced badly recreates the overdraft’s problems with a new lender.

• Replacing the overdraft without reading what it did. A term loan taken to replace a facility that covered a few days a month costs interest on money that sat idle; a flexible limit taken to replace a permanent balance is reviewed as a term loan in disguise.
• Leaving it until the limit has gone. A business that waits for the bank’s date applies with returned payments on its statements and fewer lenders whose criteria it meets.
• Layering. A new facility on top of the overdraft rather than instead of it means two lenders reading the same strain and two sets of fees for one need.
• Ignoring the trigger. A limit withdrawn after months of hard limit-riding or tax arrears is withdrawn for a reason that a new facility does not fix. The pattern has to change before the facility does.

Frequently asked questions

Related pages

• Revolving credit facility: how it is drawn and repaid
• Working capital finance
• Invoice finance
• What to do when a business loan is not approved
• Cash flow problems and the practical options
• What is a business overdraft?

Sources

The overdraft mechanics and the comparison table follow the British Business Bank's guidance, read 26 September 2026.

1. British Business Bank: business overdrafts (how the facility works, interest on the overdrawn amount, repayable on demand, the four charges, the Bank Referral Scheme), read 26 September 2026