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How a business term loan works
A business term loan delivers a single capital sum into your company account on day one. Your company then repays principal plus interest over an agreed schedule — monthly instalments are most common. The cost of borrowing is known at the outset, which makes cashflow modelling straightforward.
Term loans suit discrete, high-value expenditure: acquiring plant or equipment, funding a specific project, purchasing a commercial property, or refinancing existing debt. The lender underwrites on the strength of the whole transaction rather than day-to-day trading patterns.
How a business overdraft works
An overdraft is a pre-approved credit limit attached to your current account. Your company draws from it whenever the balance falls below zero and repays automatically as receipts land. Interest accrues only on the amount drawn each day, not on the full facility.
The key risk is that bank overdrafts are repayable on demand, meaning the lender can withdraw the facility at short notice. They are also typically reviewed annually. For this reason, directors should not use an overdraft to fund capital expenditure — if the facility is pulled, the business may be unable to service the underlying asset purchase.
Choosing between the two
Use a term loan when the purpose is specific, the amount is material, and you want payment certainty. Use an overdraft — or a revolving credit facility — when you need a safety net for timing gaps between outgoings and receipts, or for seasonal working capital swings.
- Capital expenditure → term loan
- Payroll or VAT timing gaps → overdraft or working capital facility
- Acquisition or property → secured term loan
- Stock buildup ahead of peak season → revolving credit or overdraft
Many directors run both simultaneously: a term loan for growth investment and a modest overdraft for day-to-day headroom. Your finance director or accountant can model which combination minimises total interest cost.
Frequently asked questions
Can a limited company have both a loan and an overdraft?
Yes. Lenders will assess total indebtedness when underwriting each facility, but holding both is common. A term loan for capital expenditure and an overdraft for working capital serve different purposes and are typically assessed separately.
Is an overdraft cheaper than a loan?
Not necessarily. Overdraft margins can be higher than term loan rates, and arrangement fees apply to both. The total cost depends on how much you draw and for how long. Because overdraft interest accrues daily on the drawn balance only, a small, short-lived draw may cost less — but a large drawn balance held for months can be expensive.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.