Key takeaways
- A business overdraft is a revolving credit facility linked to a business current account, allowing a business to draw up to an agreed overdraft limit when needed.
- Interest is charged only on the amount used, while the facility can normally be repaid and reused within its agreed terms.
- It is designed for short-term working capital needs, such as bridging invoice gaps, seasonal cash flow dips and temporary operating costs.
For an established business, short-term cash needs do not always line up neatly with incoming revenue. An arranged overdraft can provide flexible access to extra funds when that happens, without requiring a fixed loan upfront.
Understanding what a business overdraft is, how it works and what it costs can help a business decide whether it suits its cash flow needs.
What is a business overdraft?
A business overdraft is an arranged credit facility linked to a business current account. It allows a business to spend beyond the available balance up to a pre-agreed limit.
An arranged overdraft is agreed with the lender in advance, with a defined limit, interest rate and formal terms. An unarranged overdraft happens when a business goes beyond its available balance without an agreed facility, or exceeds its agreed limit. This can lead to extra charges and may affect the banking relationship.
Unlike a term loan, a business overdraft is revolving. The business can draw on it when needed and repay it as cash arrives, then use it again within the agreed limit.
For equipment or longer-term capital investment, asset finance may be more suitable. Businesses comparing broader funding choices may also want to understand debt financing and how to improve cash flow.
How a business overdraft works in practice
How does a business overdraft work? The facility is used when outgoings exceed the cash held in the linked account.
If a business has a £100,000 overdraft limit but only uses £30,000, interest is charged on the £30,000 outstanding, not the full £100,000. Incoming revenue then reduces the balance automatically.
What is a business overdraft example? This is the simplest one: a business waiting for customer invoices to be paid can use the overdraft to cover payroll or suppliers, then reduce the borrowing when those invoices are settled.
How does a business overdraft in a cash flow management sense? The facility: expands and contracts as money moves through the business current account.
Allica’s facility has a 12-month term and is typically renewed annually. It is also repayable on demand, meaning the lender can ask for some or all of the borrowing to be repaid. Allica says advance notice will usually be given, although not in every circumstance.
How interest and fees are calculated on a business overdraft
Interest is charged only on the amount drawn. If a business has an agreed limit of £200,000 but has used £50,000, interest applies to the £50,000 balance.
Allica uses a tracker interest rate. This means the rate is set at a margin above the Bank of England base rate and moves when the base rate changes. Its pricing is tiered, with different margins depending on facility size.
An arrangement fee applies, while renewal and professional fees may also apply. Businesses should check current pricing or use the business overdraft cost calculator rather than relying on an old figure.
How to apply for a business overdraft
An application can be completed online and usually takes a few minutes to start. A business should have up-to-date information ready, including recent accounts and bank statements.
A dedicated relationship manager is available from the application stage, giving the business a named contact who can understand its circumstances.
For businesses asking 'how much business overdraft can I get?', Allica currently offers facilities from over £25,000 up to £2 million, subject to status, credit assessment and lending criteria.
Business overdraft frequently asked questions
How can a business overdraft help my business?
How can overdraft help a business? Common uses include bridging the gap between invoicing and payment, managing seasonal dips and covering short-term operating costs.
Because the facility can be reused, it can provide working capital flexibility without requiring a new loan each time a temporary gap appears.
What is the difference between an arranged and unarranged business overdraft?
An arranged overdraft is agreed in advance with a defined overdraft limit, agreed pricing and formal terms.
An unarranged overdraft occurs where borrowing has not been agreed, or an agreed limit is exceeded. It can result in extra overdraft fees and should be addressed with the lender before additional capacity is needed.
Can a sole trader get a business overdraft?
Some lenders offer overdraft facilities to sole traders. However, Allica’s arranged secured business lending facility is available to UK limited companies and limited liability partnerships rather than sole traders.
Is a business overdraft suitable for long-term borrowing?
Usually not. A business overdraft is short-term business finance designed for working capital and temporary cash flow needs. Longer-term investment may be better matched to a loan or asset finance facility.
What happens if a business exceeds its agreed overdraft limit?
Going beyond the agreed business overdraft limit creates an unarranged excess. This can trigger additional charges and may affect the lender relationship.
If more headroom is likely to be needed, the business should contact its relationship manager before exceeding the agreed limit.
How Allica supports established businesses with a business overdraft
Allica Bank is built specifically for established businesses. Its business overdraft provides flexible working capital support alongside a dedicated relationship manager from the start.
The facility is linked to Allica’s Business Rewards Account, with interest charged only on what is used. Businesses can find out more and apply online.
Disclaimer: This is information – not financial advice or recommendation.
