Business Bank Accounts with Overdrafts
Late payments cost UK small businesses £11bn a year. An overdraft could be the difference between a cash-flow gap and a closed door.
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The Financial Services Compensation Scheme (FSCS) protects up to £120,000 of eligible deposits per person or company, per firm, which is authorised and regulated by the Financial Conduct Authority (FCA). The limit is the total of all deposits held with one firm. For more information visit www.fscs.org.uk.
Cash flow
Why an overdraft matters for cash flow
Late payment is one of the biggest threats to small-business survival in the UK — it contributes to around 14,000 business closures a year, roughly 38 a day, and the average small business waits weeks beyond agreed terms to be paid. A business can be profitable on paper and still hit serious trouble if customers pay late while suppliers, HMRC and payroll still expect payment on time.
An arranged overdraft gives you a safety net for exactly this. Rather than scrambling for short-term finance when an invoice runs late, an overdraft lets you cover the gap and clear it once payment arrives. It isn’t free money — interest applies, and unarranged or exceeded overdrafts can carry steep fees — but used properly it’s one of the simplest tools for managing timing gaps rather than genuine shortfalls.
Not every account offers an overdraft, and among those that do, limits and rates vary considerably. Many digital-only challengers don’t offer them at all, and some providers require a separate application even after your account is open, with approval not guaranteed. It’s worth checking this upfront if cash-flow timing is a regular pressure.
Source: Small Business Commissioner late-payment research, July 2025.
How it works
How business overdrafts actually work
A business overdraft is short-term borrowing attached to your current account, added via a separate application, letting you spend beyond your balance up to an agreed limit. Interest is charged only on the amount you’re actually overdrawn — not the full facility — and the limit is set by the bank based on your creditworthiness.
Arranged overdrafts are agreed in advance with a set limit and rate. Since the FCA’s 2020 reforms, arranged interest must be shown as a single Equivalent Annual Rate (EAR), with no separate daily or monthly fees. Typical EARs run from about 19% to 40% — digital banks tend to sit lower (around 15–25%), high-street banks higher (around 35–40%) — often with an arrangement fee and an annual renewal fee on top.
Unarranged overdrafts happen when you spend beyond your limit, or with no arranged facility at all. FCA rules now require the same rate for unarranged as arranged borrowing, but exceeding a limit can still mean declined transactions or account restrictions, so it isn’t a cost-free buffer. To put costs in perspective: covering a £600 subscription against a £300 balance for 10 days at 29.9% EAR would cost around £2.46 in interest — a small price for bridging a short, predictable gap.
Overdrafts aren’t guaranteed — around 39% of applications are turned down. Usage among UK SMEs rose from 9% in late 2022 to 17% in late 2023, before settling to about 13% in early 2024.
Alternatives
Overdraft vs other short-term finance
An overdraft is one of several tools for short-term cash-flow gaps, and it isn’t always the right fit. Against a business credit card: both are revolving, but a card suits smaller everyday purchases and often has an interest-free period if cleared each month, while an overdraft is more flexible for covering a shortfall in the account itself.
Against a business loan: a loan provides a fixed lump sum repaid over a term, suiting planned, larger costs like equipment or expansion, whereas an overdraft is better for temporary dips since you only pay for what you use. Against invoice finance: that releases cash tied up in unpaid invoices and can be a better fit when the problem is specifically slow-paying clients rather than general timing gaps.
As a guide: an overdraft suits short, unpredictable, one-off gaps; a loan suits planned, larger spending; invoice finance suits a recurring pattern of slow payers. Relying on an overdraft to plug an ongoing shortfall is often a sign the business needs a different type of finance, not a bigger facility.
Important Information
The accounts listed on this page are selected based on a combination of editorial merit and commercial relationships. We aim to keep all information accurate and up to date, but we recommend checking each provider's website for the latest rates, fees, and terms before applying. HowMuch may receive a referral fee if you apply for a product through our links. This does not affect our editorial independence.
What is a Business Bank Account?
A business bank account is a dedicated account for your business finances, kept separate from your personal money. In the UK, all limited companies are legally required to hold a separate business account. Sole traders are not required by law to have one, but it is strongly recommended — it makes your accounting simpler, VAT returns cleaner, and presents a more professional image to clients and suppliers.
Choosing an account
How to Choose a Business Bank Account
Choosing a business bank account is one of the first big decisions a business owner makes — and one of the easiest to get wrong by comparing on price alone. The right choice depends less on finding the cheapest account and more on matching an account's features, eligibility and support to how your business actually operates.
Eligibility
Who can open a business bank account?
Before comparing fees, check which accounts you're actually eligible for — criteria vary between providers and typically depend on:
Business structure — sole trader, limited company, partnership or LLP.
Turnover and trading history — some providers require a minimum trading period or turnover, while digital challengers often accept brand-new businesses with no history.
Residency and registration — some accounts require UK company registration or director residency, which matters for international or non-UK-resident directors.
Costs
Business bank account fees explained
Monthly fees are the most visible cost, but rarely the full picture. When comparing pricing, look at:
Monthly account fee
From free (common among digital challengers) to £5–£30+ for accounts with more features or dedicated support.
Transaction fees
Many free accounts cap the number of free transactions per month, then charge per transaction.
Transfer and payment fees
Domestic transfers are often free, but international, same-day and card payments can carry charges.
Cash and cheque deposit fees
Digital-only providers often charge more for these than banks with branch networks.
Overdraft and lending costs
Arranged overdraft rates vary widely, and unarranged fees can be steep.
Features
Features to look for
The right feature set depends heavily on your business model. Worth considering:
Accounting software integration
Direct links to Xero, QuickBooks or FreeAgent save significant admin time.
Expense management
Receipt capture, spend categorisation and multiple staff cards reduce manual bookkeeping.
Multi-currency and international payments
Check FX rates and transfer speed, not just whether multi-currency support exists.
API access
For larger or tech-forward businesses integrating banking data into internal systems.
Overdraft facilities
Useful for short-term gaps, though availability and rates vary, and they usually need a separate application.
Day to day
Features that matter day to day
Digital providers usually offer slicker apps and faster opening, but it is worth checking:
Customer support — in-app chat, phone support and response times differ, and matter most when something goes wrong.
Cash and cheque handling — if you deal in physical cash, branch or Post Office deposit access may matter more than app features.
Mobile app functionality — check invoicing, notifications and spending insights directly rather than assuming parity across providers.
Protection
Is your account FSCS protected?
Protections aren't the same everywhere, so it's worth checking rather than assuming:
FSCS protection — many, but not all, providers are covered, protecting eligible deposits up to £120,000 per person or company, per authorised institution.
E-money safeguarding — some digital providers are e-money institutions rather than banks, so funds are safeguarded instead of FSCS-protected — a different model, not necessarily less safe.
FCA authorisation — checking a provider's status on the Financial Services Register confirms they're authorised to operate in the UK.
Switching
Switching your business bank account
If you are moving from an existing account rather than opening your first, a few extra factors come into play:
Current Account Switch Service (CASS) — automates the transfer of direct debits, standing orders and payments, typically within 7 working days.
Overlap period — check how long your old account stays active during the switch, in case any payments are missed.
Switching incentives — weigh any cashback or fee waivers against the account's ongoing suitability, rather than choosing on the incentive alone.
Which business bank account is right for you?
There's rarely a single best business bank account — the right choice depends on your business structure, transaction volume, cash-handling needs and which features save you time day to day. Rather than starting from price, filter by eligibility and required features first, then compare costs across the shortlist that's left.
Compare business bank accountsFrequently Asked Questions
No. Many digital-only challenger accounts don’t offer overdrafts at all, while others only make them available after your account has been open for a while, or subject to a separate application and credit check.
Related articles
Do Sole Traders Need a Business Bank Account?
There is no legal requirement for sole traders to have a business bank account. But in practice, most will benefit from one, and with Making Tax Digital now in effect, the case has never been stronger.
How to Switch Your Business Bank Account
Switching your business bank account is simpler than most businesses expect. Here is how the Current Account Switch Service works and what to check before you start.
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