Business overdraft or loan, and which one costs less
An overdraft is cheaper for cash gaps you clear within a few months; a loan is cheaper for anything you will take a year or more to repay. The reason is behaviour more than headline rate: a loan balance shrinks every month, while an overdraft left fully drawn never does.
Bank rates checked 1 November 2026.
The difference in one table
| Business overdraft | Business loan | |
|---|---|---|
| How you pay interest | Daily, only on the amount you are overdrawn | On the reducing balance, fixed monthly payment |
| Published price (NatWest) | 13.37% representative EAR on £5,000, plus an arrangement fee | 12.57% representative APR (11.90% fixed) on £10,000 over 22 months |
| Fees | Arrangement fee, and at most banks an annual renewal fee | NatWest: no set-up fee and no early repayment fee |
| Can the bank withdraw it? | Yes: repayable on demand, reviewed yearly | No, while you keep up the payments |
| Typical size | £500 to £25,000 (Santander) or £50,000 (Barclays, NatWest) | NatWest £1,000 to £100,000; Funding Circle £10,000 to £750,000 |
| Best for | Seasonal dips, late-paying customers, emergencies | Equipment, a refit, stock you sell over a year |
Business overdraft rates compared
Representative rates published by four high street banks. Representative EAR is the rate at least 51% of accepted customers get; it excludes fees, and all four are variable.
| Bank | Representative EAR | Fees | Limits and conditions |
|---|---|---|---|
| Barclays | 16.85% (£500 to £5,000) falling to 13.30% (£20,001 to £25,000) | £25 to £150 on limits to £5,000; 1.4% to 2.5% of the limit above £15,000 | £500 to £50,000 unsecured. Ltd and LLP lending up to £100k requires a personal guarantee. |
| HSBC | 14.54% | Arrangement fee proportional to the limit (minimum £25), plus an annual renewal fee | Up to £100,000 online or by phone. Unarranged borrowing at 19.50%. |
| NatWest | 13.37% (on a £5,000 limit) | £50 to £100 on limits to £5,000; 1.5% (minimum £150) above | Up to £50,000 unsecured online. Reviewed after 12 months. |
| Santander | 14.94% (on a £1,000 limit) | 1.75% a year (minimum £100), charged even if unused | £500 to £25,000. Requires a good credit history and no IVA in the last 6 years. |
Two things stand out. Small limits cost more per pound (Barclays charges 16.85% EAR at £500 to £5,000 and 13.30% at £20,001 to £25,000), and the fee can matter more than the rate on a facility you barely use: Santander's 1.75% annual fee, minimum £100 is charged even if you never go overdrawn.
Worked example 1: a three month gap
The house example: a shop taking £5,000 a month on cards needs £5,000 to buy stock ahead of a busy season and expects to clear it in 3 months.
- Overdraft at NatWest's 13.37% EAR, fully drawn for 3 months: £5,000 × (1.13373/12 − 1) = £159.34 interest, plus the £100 arrangement fee = £259.34.
- Loan: most term loans run for at least a year. With no early repayment fee you could clear it after three months, but you would need a new application next season. The overdraft stays in place to use again.
Verdict: overdraft. For a short, known gap it is cheaper and simpler.
Worked example 2: a two year need
Now the same shop borrows £10,000 for a refit and needs 22 months to pay it back. NatWest publishes this exact loan: £508.17 a month at 11.90% fixed, £1,179.77 interest in total, and no set-up fee.
- Overdraft left fully drawn for 22 months, assuming the same 13.37% EAR applied at £10,000 (NatWest prices each limit individually): £10,000 × (1.133722/12 − 1) = £2,586.74, plus a £150 arrangement fee (1.5%, minimum £150) = £2,736.74, and renewal fees on top.
- Overdraft paid down by £508.17 a month, like the loan: about £1,261.79 interest plus the £150 fee = £1,411.79. Close to the loan, but only if you keep up the discipline, and the bank can still review or withdraw it at renewal.
Verdict: loan. £1,556.97 cheaper than leaving the overdraft drawn, and nobody can take it away at the annual review.
When to use neither
If your income comes mostly by card and swings with the season, a fixed loan payment in a quiet month can hurt more than the interest. A card-sales advance repays as a share of takings instead; it costs more, so read merchant cash advance vs overdraft first. And if the gap is caused by customers paying late, chase the invoices or look at working capital finance before borrowing against your own account. Work out loan repayments in our business loan calculator.
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Questions people ask
Is a bank overdraft or a loan better for a small business?
An overdraft is better for gaps you clear within a few months, because you only pay interest on what you use. A loan is better for anything you will take a year or more to repay. On NatWest's published figures, £10,000 left in an overdraft for 22 months costs about £2,737, against £1,179.77 on their loan example.
What are UK business overdraft interest rates?
Representative EARs published by the big banks on 1 November 2026: Barclays 16.85% (£500 to £5,000) falling to 13.30% (£20,001 to £25,000); HSBC 14.54%; NatWest 13.37% (on a £5,000 limit); Santander 14.94% (on a £1,000 limit). Representative EAR excludes arrangement and renewal fees, which every bank charges.
Can the bank take my overdraft away?
Yes. Barclays, HSBC and Santander all state the bank can ask for repayment at any time, and facilities are reviewed every year. A term loan cannot be withdrawn while you keep up the payments, which is the main reason not to fund long-term spending on an overdraft.
Can I have a business loan and an overdraft at the same time?
Yes, and many businesses do: a loan for the fixed cost such as equipment or a refit, and a smaller overdraft for the swings in cash flow. Lenders add both repayments together when they assess affordability.
What can I use instead of an overdraft if I have bad credit?
Bank overdrafts usually need a clean file: Santander, for example, asks for a good credit history and no IVA in the last 6 years. Alternatives include a card-sales advance, which is based on takings rather than credit, or invoice finance if you invoice other businesses. Both cost more than an arranged overdraft.
Is an overdraft cheaper than a loan if I repay the loan early?
Often not by much. NatWest's Small Business Loan has no set-up fee and no early repayment fee, and Funding Circle has no fees to settle early, so repaying early cuts the interest. The overdraft still wins on flexibility: you can redraw it without a new application.
Sources
Every figure on this page comes from the lender's or scheme's own published page, read on 1 November 2026. Panel rate ranges come from our partner's lender-panel catalogue, checked 1 September 2026. We do not use comparison sites as sources.