An overdraft is an arrangement that lets an account balance fall below zero up to an agreed limit, so payments can continue when the balance runs out. Interest and fees usually apply to the amount overdrawn.
General information, not financial, legal, or tax advice. Verify current terms and eligibility with the provider before applying.
How an overdraft works
An overdraft is a borrowing arrangement attached to a current account that lets the balance go below zero up to a limit set by the bank. When outgoing payments are larger than the money in the account, the account becomes overdrawn and the bank covers the difference up to the limit. The business borrows only the amount it actually uses and can repay it as money comes into the account, so the balance owed rises and falls with use. Interest is normally charged on the overdrawn amount, and the bank may also charge an arrangement fee or a usage fee. This information is current as of 12 June 2026.
Arranged and unarranged overdrafts
An arranged overdraft is one agreed with the bank in advance, with a set limit and known charges. An unarranged overdraft happens when an account goes below zero without an agreement in place, or beyond an agreed limit. Unarranged overdrawing is usually more expensive and the bank may decline the payment instead of covering it. The exact charges and whether payments are allowed depend on the bank and the account.
Why it matters to a business
An overdraft can act as a short term buffer that helps a business manage uneven cash flow, for example when a payment is due before money from customers arrives. Because the business pays only for what it uses, it can be flexible, but the interest and fees mean it is usually meant for short term gaps rather than long term borrowing. A bank can also reduce or withdraw an overdraft, sometimes at short notice. Compare the interest rate, fees, and terms, and confirm them with the provider before relying on an overdraft.
Frequently asked questions
What is an overdraft?
What is the difference between an arranged and an unarranged overdraft?
Do you pay interest on an overdraft?
Is an overdraft the same as a loan?
Definitions, fees, features, and eligibility change and vary by region. This page was last reviewed on 12 June 2026. Confirm current terms with the provider before applying.