What is a business overdraft?

Cash flow gaps are a common challenge for early-stage businesses — particularly when large expenses fall before customer payments arrive. A business overdraft is one of the tools available to manage these gaps, and understanding how it works and how it differs from other forms of short-term borrowing helps founders make informed decisions about their banking arrangements.

A business overdraft is a pre-agreed credit facility attached to a business bank account that allows the account to go below zero up to a specified limit. It is typically used to cover short-term cash flow gaps rather than long-term financing needs. Interest is charged only on the amount overdrawn and for the period it is outstanding. An arranged overdraft agreed in advance with the bank is significantly cheaper than an unarranged overdraft, which incurs higher charges.

An overdraft is a short-term facility and is generally not suitable as a long-term financing solution. Relying on one regularly can indicate a structural cash flow problem that warrants a more considered response — whether that means better debtor management, revised payment terms, or a more appropriate credit facility. Our guides to business cash flow and short-term finance cover the options available to UK founders managing cash flow timing gaps.