Business overdraft vs business loan: which is cheaper?

A business loan is usually cheaper if you need the money for a year or more. An overdraft is usually cheaper if you dip into it for a few weeks at a time, because you only pay interest on the days you are overdrawn. The figures below use the banks’ own published rates and fees, checked on 6 November 2026.

Which is cheaper: an overdraft or a loan?

The answer depends on how long you borrow and how much of the facility you use. Overdraft rates are higher, and there is a yearly fee whether you use the overdraft or not. Loan rates are lower and the balance falls as you repay, but you pay interest on the whole amount from day one.

What do UK banks charge?

Published business rates vary widely, so compare the total cost, not just the headline rate.

Overdrafts. Santander’s business overdraft page showed 14.94% EAR (variable) and an annual arrangement fee of 1.75% of the agreed limit, minimum £100. Limits run from £500 to £25,000. Santander’s own example: using a £1,000 overdraft in full for 30 days costs £11.52 in interest, plus the £100 fee.

NatWest sets its arrangement fee by limit:

NatWest says the fee applies when setting up or renewing the facility, and facilities run for up to 12 months.

Loans. HSBC UK’s Small Business Loan lends £1,000 to £25,000 over 12 months to 10 years at a fixed rate. It showed 11.3% representative APR up to £10,000 and 8.6% above £10,000, with no arrangement fee. HSBC’s example: £7,000 over 60 months costs £151.34 a month, £9,080.40 in total. NatWest’s Small Business Loan lends £1,000 to £100,000 over 1 to 7 years with no set-up or early repayment fees.

Worked example: borrowing £10,000

These examples use Santander’s overdraft pricing and HSBC’s 11.3% APR. They are our calculations, rounded to the nearest pound.

The loan wins over a full year because its rate is lower and you repay capital monthly. The overdraft wins for a short gap because interest stops when you clear it. HSBC’s shortest term is 12 months, and repaying early still costs one month and 28 days of interest from your rebate.

Which applies to you?

Match the product to the reason you are borrowing.

• If you need cash for a few weeks to cover late-paying customers, an overdraft is usually cheaper. See working capital explained.
• If you are buying equipment, a vehicle or stock you will pay off over years, a loan or asset finance is usually cheaper.
• If you are permanently overdrawn, you are paying overdraft rates on long-term borrowing; consider moving the hard-core balance to a loan.
• If you might not need the money at all, a small overdraft costs only the annual fee.
• If you need certainty, a fixed-rate loan protects you from Bank Rate rises.

Other differences that affect cost

Price is not the only difference between the two.

• Overdrafts can be withdrawn. Banks review them, usually yearly, and can reduce or cancel them.
• Variable rates move. The Bank of England raised Bank Rate from 3.75% to 4% on 5 November 2026. The rates above were published before or around that date, so check them again before you apply.
• Unarranged borrowing costs more. Going over your limit triggers unarranged rates and paid or unpaid item fees.
• Guarantees. Lenders may ask directors for a personal guarantee on either product.

For a wider rate comparison, see business loan interest rates and business loans in the UK.

What to do now

1. Run a cash flow forecast to see how long you need the money.
2. Add up total cost: interest plus every arrangement, renewal and early repayment fee.
3. Ask your bank for a personal quote; representative rates apply to only 51% of applicants.
4. Review any overdraft you have not used in the last year and cancel it if you do not need it.

Frequently asked questions

Is an overdraft cheaper than a loan?

Only for short or occasional borrowing. For money borrowed for a year or more, a loan is usually cheaper because the rate is lower and the balance falls each month.

Do I pay the overdraft fee if I do not use it?

Usually yes. Santander charges its 1.75% annual fee on the agreed limit even if the overdraft is never used.

What is the difference between EAR and APR?

EAR is the yearly interest rate on an overdraft, excluding fees. APR, used for loans, includes interest and compulsory fees, so the two are not directly comparable.

Can the bank take my overdraft away?

Yes. Business overdrafts are reviewed regularly, usually every 12 months, and the bank can reduce or withdraw the limit.

Will the Bank Rate rise affect my borrowing?

It can affect a variable overdraft rate. A fixed-rate loan agreed before the rise keeps the same rate for its whole term.