Definition
A business overdraft lets a business spend past a nil balance in its everyday account, up to a set ceiling. Interest is charged on the overdrawn balance and a limit or account fee often applies. Because it works automatically inside the account, it handles brief, unpredictable shortfalls well. An account that stays overdrawn most of the time suggests a deeper funding issue.
The overdraft is the quiet workhorse of small business banking. It sits behind the transaction account and catches the days when bills land before payments arrive.
How it works
With an overdraft facility, the account can go negative up to the approved limit. Money coming in automatically reduces the overdrawn balance. No set instalments apply, yet the bank reviews the limit and wants to see the balance swing back into the black often.
Costs
Interest applies to the overdrawn balance, often calculated daily, and many facilities charge a monthly or annual fee on the limit. Over-limit and dishonour fees apply if payments exceed it.
Warning signs
If the balance stays negative month after month, the overdraft has become permanent funding rather than a buffer. Lenders reading your statements notice. Our overdraft review explains alternatives. To talk about the right buffer for your business, make one enquiry.
Common questions
What happens if I exceed my overdraft limit?
Payments may be dishonoured and fees charged. Repeated over-limit events also show up in bank statements that other lenders review.
Is an overdraft secured?
Smaller overdrafts may be unsecured for established customers; larger limits are often secured by property or a general security agreement.
Sources and further reading