Definition and how it works
A business overdraft is a type of credit granted to qualifying business account holders at a bank. This could be a high street bank like Lloyds, Barclays and HSBC, or app-based, digital bank like Cashplus.
A business overdraft allows your bank account balance to go negative to a specified limit without being penalised for it. Instead, you pay an interest rate for every day you’re in minus (below £0) until your balance is positive again. The interest fee is automatically deducted from your account, as per your fees schedule.
The overdraft limit is determined by your credit history, turnover and other factors checked by your account provider at the time of your application. This limit could be anything between a few hundred to millions of pounds. For a small business, it’s typically between £500-£25,000.
Once an overdraft is approved, it will stay in your business account until you either request to remove it or the bank decides to remove it (which – although rare – they may do at any time). After a while, the bank may offer a higher limit automatically, or you can directly request a limit change.
In some cases, you can get an overdraft for a fixed period of time agreed in advance. For example, NatWest offers a 12-month business overdraft facility that will be reviewed after the 12 months are up.