A UK business overdraft lets you draw more than your account balance up to a pre-agreed limit, paying interest only on the amount used. The big four banks publish representative EARs of 13.26–16.85% on the drawn balance, plus an arrangement fee (from £25 up to 2.5% of the limit at Barclays). Here is how business overdrafts work in 2026, what they cost, and when they are the right choice.
- Big four bank overdrafts cost 13.26–16.85% EAR - the banks’ published representative rates, plus an arrangement fee (up to 2.5% of the limit at Barclays) whether you draw on it or not
- Overdrafts cost more per pound than bank loans - 13.26%+ EAR against 8.5–15.73% representative APR on high-street bank loans, but an overdraft only charges interest on what you actually draw
- NatWest publishes the lowest big-four rate at 13.26% EAR - Barclays reaches 16.85% on small limits; online revolving credit alternatives like iwoca can charge up to 50% APR, so structure matters as much as headline rate
- Perfect for businesses needing £1,000–£25,000 short-term funding - ideal for cash flow gaps rather than major investments or equipment purchases
- Major downside: the facility is repayable on demand - banks can withdraw or reduce it at any annual review, so treat it as short-term cover, not permanent funding
What Is a Business Overdraft?
A business overdraft is a revolving credit facility attached to your business current account. You can borrow up to a pre-agreed limit at any time and repay as cash flows in – there is no fixed repayment schedule. Interest accrues only on the amount drawn, not the full facility. Unlike a business loan, an overdraft is repayable on demand and is reviewed annually by the bank.
Business overdrafts are the oldest and most flexible form of business credit. They function as a safety net for cash flow gaps – useful when customer payments are delayed, payroll falls before a large invoice clears, or unexpected costs arise. Unlike a business loan, you do not draw the full facility on day one: you use what you need, when you need it, and repay as cash comes in.
The key structural difference from other business finance: an overdraft is repayable on demand. The bank can, in principle, withdraw the facility or demand repayment at any renewal review. This makes it unsuitable as a long-term funding solution for business investment, but ideal for managing short-term cash flow timing differences. You can compare options in our What Is Invoice Factoring?.
Business Overdraft Costs in 2026
Business overdraft costs have two components: an arrangement fee (from £25 up to 2.5% of the limit at Barclays; 1.99% a year at Lloyds for £5,001–£25,000) and a usage rate. Barclays and Lloyds publish margins of 8.8–11.92% over base rate. With the Bank of England base rate at 3.75% (September 2026), that is roughly 12.55–15.67% a year before compounding, and the big four’s representative EARs run 13.26–16.85%. On a £10,000 overdraft used for 30 days, the interest charge at a 15% EAR is approximately £123.
| Cost Element | Typical Range | How Charged | Notes |
|---|---|---|---|
| Arrangement fee | £25 to 2.5% of the limit (Barclays); 1.99% a year, min £150 (Lloyds) | Annually on renewal | Charged whether you use the facility or not |
| Usage interest | Base rate + 8.8–11.92% (Barclays, Lloyds) | Daily on drawn balance | Only on amount actually used; big four representative EAR 13.26–16.85% |
| Unauthorised overdraft fee | £25–£50/month + higher rate | Per month in unauthorised overdraft | Avoid – significantly more expensive than authorised rate |
| Non-utilisation fee | 0–0.5% of unused facility | Quarterly or annually | Some banks charge for headroom you are not using |
Worked example: a £25,000 overdraft facility with a 1.5% arrangement fee (£375 p.a.) and a 15% EAR on drawn balance. If you use £10,000 of the facility for an average of 60 days over the year, the interest cost is approximately £247. Add the £375 arrangement fee and total annual cost is £622 – equivalent to 2.49% of the facility or 6.22% of the £10,000 drawn. For alternatives, see our Business Loan Costs UK 2026.
Business Overdraft Rates: UK Banks Compared
UK business overdraft rates are set individually based on the business’s risk profile and relationship, but the big four banks publish representative rates. Barclays and Lloyds publish margins of 8.8–11.92% above the Bank of England base rate (3.75% as of September 2026), and the big four’s representative EARs run 13.26–16.85% on drawn balances. Online lenders offering overdraft-equivalent facilities typically charge more.
| Provider | Typical EAR | Facility Size | Arrangement Fee | Account Required |
|---|---|---|---|---|
| Barclays | 13.30–16.85% EAR (representative, by limit) | £500–£25K (published bands); higher on request | £25 to 2.5% of limit | Barclays business account |
| HSBC | 14.54% EAR (representative) | Based on business profile | Proportional to limit, min £25 | HSBC business account |
| NatWest | 13.26–13.37% EAR (representative) | Up to £50K (SME); higher for larger businesses | £75–£375 (limits to £25K) | NatWest business account |
| Lloyds | 15.62% EAR (representative) | Up to £50K (instant decision) | £12/month to £5K; 1.99% p.a. (min £150) to £25K | Lloyds business account |
| Funding Circle FlexiPay | ~20–30% EAR equivalent | £1K–£250K | Transaction fee 1.99%+ | No (incorporated businesses) |
| iwoca Flexi-Loan | ~29–50% APR | £1K–£500K | No arrangement fee | No |
Note: the bank figures are each bank’s published representative rate (checked 22 September 2026); your own rate is set individually and moves with Bank Rate. Online revolving credit facilities (Funding Circle FlexiPay, iwoca Flexi-Loan) are not technically overdrafts but perform a similar function without requiring a current account with that provider.
How to Apply for a Business Overdraft
Business overdrafts are typically only available through your existing bank – you cannot apply for a standalone overdraft as a new customer without opening a business account first. Application requires: 12 months of business bank statements, most recent 2 years of filed accounts (or management accounts for newer businesses), cash flow forecast, and in some cases a personal guarantee from directors.
Most UK businesses apply for an overdraft as part of their main banking relationship. The process:
- Contact your business bank manager or relationship manager – or apply online via your bank’s business banking portal.
- Provide supporting information – typically 12 months of bank statements, recent accounts, and a cash flow forecast explaining why you need the facility and when you expect to reduce the balance.
- Credit assessment – the bank reviews personal and business credit history, trading history, and the purpose of the facility.
- Facility offer and terms – the bank proposes a limit and rate based on its risk assessment. These are negotiable, particularly for businesses with a strong track record.
- Annual review – most business overdrafts are reviewed each year. Consistently using the full facility without repaying may prompt the bank to reduce the limit or raise the rate.
Business Overdraft vs Business Loan: Which Is Better?
Use an overdraft for recurring, short-term cash flow gaps where the balance rises and falls with business cycles. Use a business loan for capital investment, purchasing assets, or funding growth where you need a fixed sum for a defined purpose and can manage fixed monthly repayments. Never use a permanent overdraft to fund what is effectively a working capital shortfall – lenders will notice and may withdraw the facility.
| Factor | Business Overdraft | Business Loan |
|---|---|---|
| Repayment structure | Flexible (draw/repay at will) | Fixed monthly instalments |
| Interest charged on | Amount drawn only | Full outstanding balance |
| Repayable on demand? | Yes – bank can call it in | No – fixed term contract |
| Best for | Recurring cash flow timing gaps | Capital investment, fixed-sum needs |
| Typical cost (drawn) | 13.26–16.85% EAR (big four) | 8.5–15.73% APR (high-street bank representative) |
| Requires existing account? | Usually yes | Not always |
Alternatives to a Business Overdraft
If your bank declines an overdraft or the facility is not large enough, the most practical alternatives are: invoice finance (unlocking cash from unpaid invoices – faster and often cheaper for invoice-heavy businesses), a revolving credit facility from an online lender (no account required), or a short-term business loan to bridge a specific gap. All can be arranged without switching your main business account.
For businesses that cannot access a bank overdraft – or need a larger facility than their bank will provide – these alternatives serve a similar cash flow function:
Invoice finance. If your cash flow problem is caused by delayed customer payments, invoice factoring or discounting directly addresses the root cause. You receive 80–90% of invoice value within 24 hours rather than waiting 30–90 days. For B2B businesses with regular invoicing, this is typically cheaper and more scalable than an overdraft.
Revolving credit facility. Funding Circle’s FlexiPay and iwoca’s Flexi-Loan are revolving credit products that function like overdrafts but do not require a business account with the provider. They typically cost more than a bank overdraft but offer faster setup and flexible eligibility criteria.
Business credit card. For smaller, frequent purchases (stock, supplies, travel), a business credit card with 0% on purchases for an introductory period can be more cost-effective than drawing on an overdraft. Cards also provide purchase protection and expense management that overdrafts do not.
Related Business Finance Guides
Explore the full range of working capital options before deciding whether an overdraft is the right structure for your business.
Pros and Cons
