Business Bank Account Overdrafts Explained

A clear look at business overdrafts in the UK

For many UK small businesses, a bank overdraft can smooth out the bumps between invoices going out and payments coming in. It is familiar, flexible and usually quick to set up with your business current account. But the landscape has shifted. Overall overdraft stock for SMEs fell to around £8.3 billion in 2024 and application success rates have become patchier, with a notable share declined. At the same time, pricing can be steep, especially if you slip into unauthorised borrowing.

This guide explains how arranged overdrafts work, what they cost today, where the pitfalls lie and the alternatives worth weighing up. The aim is to help you decide if an overdraft genuinely serves your cash flow, or if another funding route could leave you with lower costs and fewer surprises. No jargon, no hard sell - just practical steps in plain English.

An overdraft should be a short bridge - not a long-term foundation for working capital.

Who will benefit from this guide

If you run a UK micro business or SME and want a simple explanation of business overdrafts - how they are priced, when they help, and when to avoid them - this is for you. It is especially useful if you are comparing banks, worried about costs, or have had an application declined and need plan B options.

What an overdraft really offers

A business overdraft is a revolving credit facility attached to your current account. The bank sets a limit and you pay interest only on the amount you actually use. This makes it handy for short-term gaps, such as covering payroll while you wait for invoices to clear or buying stock ahead of seasonal peaks. Some banks also charge arrangement or renewal fees, and most review the facility at least annually.

Pricing varies. Digital-first banks often use tiered Effective Annual Rates based on affordability and credit profile, while high street banks blend base rate margins with fees. Authorised rates can look competitive for strong applicants, but costs ramp up quickly if you exceed your limit or borrow for longer than planned. Crucially, an overdraft is repayable on demand, so it is not a substitute for a term loan when you need predictable funding over months or years.

How banks assess and price your facility

Lenders gauge risk using your account conduct, cash flow patterns, trading history and filed accounts. Strong, consistent inflows and up-to-date management information can help. Expect credit checks and, for larger limits, security or personal guarantees. Pricing then reflects risk: some providers publish clear tiers, others quote case by case.

In practice, arranged business overdrafts commonly sit in mid-to-high double-digit EAR bands for many SMEs, while unauthorised borrowing is materially more expensive. Usage alerts, online eligibility checkers and app dashboards can help you track costs in real time. Remember interest accrues only on what you use, but fees may apply even if you do not draw the facility. Review your limit, pricing and conditions at least annually so it keeps pace with your trading.

Why the market is getting tougher

Total SME overdraft borrowing has trended down since 2020, and overall bank lending stocks have fallen year on year. That hints at tighter credit conditions. Rejection rates for overdrafts have also bitten for a meaningful share of applicants, pushing some firms to look beyond their main bank. Meanwhile, price pressure has intensified. Some providers publish tiers around 15 percent to 35 percent EAR for arranged borrowing depending on credit, with unarranged costs at higher levels. The gap between a well-managed facility and slipping over your limit can be the difference between manageable finance and margin erosion.

Put simply, overdrafts can still be useful for short, predictable cash gaps. But higher pricing, fees and lower approval odds mean it is wise to compare options side by side and avoid using an overdraft as a long-term funding solution.

Snapshot of selected UK business overdrafts

Short standout point: Arranged facilities with clear pricing and alerts are safer - unauthorised borrowing can spiral costs.

Next steps to compare fairly

• Download your last 6 months of bank statements to evidence cash flow.
• Use each bank’s eligibility checker to gauge likely limits and pricing.
• Model best case and worst case interest using realistic utilisation.
• Check all fees: arrangement, renewal, monthly and unarranged charges.
• Set alerts so you never drift into unauthorised territory.

Pros and pitfalls at a glance

Red flags and small print to watch

Plan your usage before you apply. An overdraft is designed for short-term cash smoothing, not long-term working capital. If your forecasts show a persistent deficit, a term loan or invoice finance may be a better fit. Examine the EAR and any base rate linkage, plus how and when interest compounds. Scrutinise all fees, including renewal, monthly service and unarranged charges if you exceed your limit.

Your overdraft conduct feeds into your business credit history. Regularly breaching limits, late interest payments or incurring charges can make future borrowing more difficult. Limited companies hold deposit protection under FSCS rules that is distinct from owners’ personal protection, but it does not remove the risks associated with debt. Finally, remember overdrafts can be reduced or withdrawn, particularly if trading weakens, so avoid relying on them for core funding.

Practical alternatives worth a look

1. Invoice finance - release cash against approved invoices to match funding to sales.
2. Business credit cards - short interest-free periods if repaid in full each month.
3. Asset finance - fund equipment or vehicles with the asset as security.
4. Merchant cash advance - repayments flex with card takings, useful for retail and hospitality.
5. Short-term business loan - fixed term and repayments for clearer budgeting.
6. Trade finance - support for import orders and supplier payments.
7. Dynamic discounting - offer early payment discounts to bring cash in faster.

Common questions, straight answers

• How much do business overdrafts cost now?
  Rates vary by bank and credit profile. Many SMEs see arranged EARs in the mid-to-high teens, with some tiered products lower for stronger applicants. Unauthorised borrowing is materially higher.

• Are overdrafts easier to get than loans?
  Not always. Approval rates fluctuate and a notable share of applications are declined. Good account conduct, recent management accounts and realistic limits improve your chances.

• Will an overdraft affect my credit score?
  Yes. Lenders assess usage, limit breaches and payment history. Sensible use can support your profile, but repeated overuse or fees can harm future funding options.

• How big a limit should I request?
  Map your cash flow. Set a limit to cover realistic timing gaps plus a small contingency, not your full working capital requirement. Oversized limits can be declined or overpriced.

• What happens if the bank withdraws my facility?
  Overdrafts are repayable on demand. If withdrawn, the bank will ask for immediate repayment. Keep contingency options ready, such as a backup facility or alternative funding.

How Switcha fits into your decision

Choosing between overdrafts and alternatives should be straightforward. Switcha will connect you with the best options for what you are looking for, help you compare pricing and features side by side, and keep the process clear and transparent so you can make an informed call without pressure.

Important information

This guide offers general information, not financial advice. Pricing, eligibility and limits change frequently. Always check terms with providers and consider speaking to a qualified adviser if you are unsure which funding option suits your business.