What is the difference between an overdraft and a business loan?

How an overdraft works

A business overdraft sits on your current account and lets you keep spending after the balance reaches zero, up to a pre-agreed limit. It's revolving and on-demand: you use it when cash dips and it clears automatically as money comes back in, with no separate application each time. You pay interest only on the amount you're actually overdrawn, calculated daily, plus any arrangement or usage fees the bank applies. That flexibility makes it ideal for small, unpredictable, short-lived gaps. The downsides matter, though: limits are usually modest, rates can be relatively high, and many overdrafts are repayable on demand, so the bank can reduce or withdraw the facility.

How a business loan works

A business loan advances a fixed amount up front, which you repay over an agreed term in scheduled instalments of capital and interest. You know the total cost and the end date from the very start, which makes it easy to budget around and plan with confidence. Interest applies to the whole advanced sum, but headline rates are often lower than overdraft rates, and the amounts available are typically larger. A loan suits a defined, planned cost — buying stock for a big contract, settling a sizeable tax bill, funding a specific project — where you need a particular amount and want certainty over both the repayment schedule and the total you'll pay.

Flexibility versus certainty

The core difference is structure, and each has a flip side. An overdraft is flexible but open-ended and potentially withdrawable; a loan is rigid but certain and committed for its term. With an overdraft you risk relying on a facility the bank can pull at short notice; with a loan you commit to repayments whether or not you end up needing every pound. Cost depends squarely on usage — an overdraft can be cheaper for occasional, brief dips, while a loan is usually more economical when you need a larger sum sustained over a period. The right tool tracks the genuine shape of your need.

When to use which

Use an overdraft for genuine day-to-day buffering of small, irregular swings — the kind of gap that opens and closes within a week or two. Use a loan when you have a clear amount and a clear purpose and want a fixed plan to clear it on a known date. A common trigger for switching to a loan is an overdraft that's too small for the need, or one the bank has trimmed or withdrawn just when you relied on it. If you find yourself permanently at the bottom of an overdraft, that's usually a sign the need is really a loan-shaped one.

What this means for your company

Credicorp provides short-term working-capital loans to UK limited companies, lending to the company with no director's personal guarantee. That makes a loan a dependable alternative when an overdraft is too small, has been withdrawn, or simply doesn't give you the certainty you need for a planned cost. You get a committed sum and a fixed schedule you can plan around, rather than a facility that can change under you. For related detail see loan versus credit facility and working capital finance.