What is an overdraft?

An overdraft is essentially a revolving credit facility and is only available from your bank. Your bank is likely to charge an arrangement fee, and the interest charged is typically a margin (e.g. 5%) above the current base rate.

What is an overdraft used for?

An overdraft is predominantly for short-term needs, although it is possible to renew this over several years, and to increase or reduce it according to the business needs.

Overdrafts are often what a business uses to help managing cash flow on a day-to-day basis and as it grows incrementally. Loans, leasing or hire purchase agreements are in most cases better suited to larger longer-term purchases, such as investment in plant and machinery, computers or transport.

Obtaining an overdraft

To obtain an overdraft, management must prove to the lender that the business will generate the income and cash to repay the facility according to the terms agreed and service the debt by meeting interest payments.

Market conditions and regulatory requirements, such as those that mandate responsible lending to viable businesses, may also impact the ease with which a business can access an overdraft.

It is likely (though not always the case) that the business will need to provide security for any money borrowed against other personal or business assets.

Entrepreneurs benefit from the knowledge, insight and network of advisers who deal day-to-day with banks and other finance providers. However, businesses themselves should cultivate relationships with banks and other finance providers, who may help meet future financing requirements rather than just the immediate needs.

Next steps

• To find out more, visit the UK Finance website.
• Businesses looking for an overdraft should speak to their own bank or adviser. Find out how to secure the right financial advice.