Business overdraft use hits a six-year high: what to do
UK small firms are using 51.4% of their overdraft limits, the highest since March 2020, even as bank lending hits a post-pandemic high. What it means for your cash flow and practical steps to take now.
UK small businesses are leaning harder on their overdrafts than at any time since the start of the pandemic. UK Finance's latest Business Finance Review shows firms were using 51.4% of their agreed overdraft limits in the second quarter of 2026, the highest level since March 2020, even though bank lending to smaller firms also hit a post-pandemic high.
Those two facts together tell a clear story. More businesses are borrowing, and many are using short-term credit to cover the gap between paying bills and getting paid. If your overdraft has quietly become a permanent part of how you run the business, now is a good time to look at why, and whether there is a cheaper or better-matched way to fund it.
What the latest figures show
UK Finance collects lending data from the main high street banks. Its review for April to June 2026, published on 21 September, reported:
- £5.35 billion of gross lending to SMEs in the quarter, the strongest since the pandemic and more than 26% up on the same quarter of 2025.
- Overdraft use at 51.4% of agreed limits, the highest since March 2020, rising for both small and medium-sized firms.
- Loan applications from medium-sized firms fell by 40% by value between March and April, a sign that some owners paused borrowing plans during an uncertain spring.
The earlier picture was similar. UK Finance reported in June that lending to the smallest businesses in the first quarter of 2026 rose 51% year on year, to its highest level since early 2018, excluding the Covid loan schemes. Overdraft applications were rising at the same time.
So lenders are lending. But the high overdraft use suggests that a lot of firms are using credit to keep cash flowing day to day rather than to invest.
Why overdraft use climbs
There is rarely one cause. The usual ones are:
- Customers paying later. If your invoices take 60 days to clear but your suppliers want paying in 30, the gap has to be funded somewhere, and the overdraft is usually closest to hand.
- Higher running costs. Wages, energy, rent and stock have all risen in recent years. Margins that once absorbed a quiet month no longer do.
- Uneven takings. Hospitality, retail and beauty businesses often have strong and weak weeks. An overdraft smooths that, which is what it is for, until the balance stops returning to zero.
- Card payment costs nobody has checked. Card fees come out of every sale. If your rates were set years ago, you may be paying more than you need to on every transaction, and it adds up quietly.
What this means for your business
An overdraft is a useful tool. It is flexible, you only pay interest on what you use, and it is there when a big bill lands early. The problem comes when it becomes your main source of funding.
A few things to keep in mind:
- Overdrafts can be withdrawn or reduced. Banks usually review them each year and can change the limit. Relying on one for core costs leaves you exposed if that happens.
- The cost can be higher than you think. Overdraft interest rates and arrangement fees vary by bank and by business. Check your latest statement and your facility letter so you know exactly what you pay.
- A permanently high balance can affect future borrowing. Lenders look at how you manage existing credit when you apply for more.
The Bank of England's Bank Rate is 3.75%, and its next decision is due on Thursday 5 November 2026. A change in Bank Rate can feed through to variable-rate borrowing, including many overdrafts, so it is worth knowing how your own facility is priced.
Practical steps to take this month
- Pull 12 months of bank statements and note the lowest and highest overdraft balance each month. If it never returns to zero, part of that balance is really long-term borrowing.
- List what the overdraft is paying for. Stock, wages, a one-off repair, VAT? Short-term needs suit an overdraft. Longer-term needs may suit a different product.
- Chase what you are owed. Tighten payment terms, send invoices the day work is finished and follow up promptly. Our guide to the Commercial Payments Bill and late payment rules explains the rights you already have.
- Check your card fees. Ask your provider for a breakdown of what you pay per transaction, including any monthly and terminal charges. A free card fee review shows you whether your rates are in line with the market.
- Compare funding that matches the need. For a defined cost, such as equipment or a refit, a term loan with fixed repayments can be easier to plan around than a rolling overdraft. For businesses that take a lot of card payments, revenue-based finance (sometimes called a merchant cash advance) is repaid as a share of your future card or online takings, so repayments go up and down with your sales. It usually costs more than a standard business loan, and the total cost depends on how quickly you repay.
- Talk to your bank early. If you expect to need more headroom, raise it before you hit your limit, not after.
Frequently asked questions
Is it bad to use my business overdraft every month?
Not necessarily. Overdrafts are designed for short-term ups and downs. It becomes a concern when the balance never clears, because you are then paying interest on what is effectively a long-term loan that the bank can reduce or withdraw.
Can I swap my overdraft for a business loan?
Many businesses do. A loan gives you a fixed amount and a repayment schedule, which can make planning easier. Whether it is cheaper depends on the rate, fees and term you are offered. Approval and terms depend on your trading history.
How can card fees affect my cash flow?
Card fees are taken from every card sale, usually before the money reaches your account. Even a small difference in the rate you pay can add up over a year if most of your customers pay by card. Reviewing them is one of the simplest cost checks you can make.
Get a second opinion
If your overdraft has crept up, we can help in two ways. We can look at what you pay to take card payments through a free card fee review, and we can compare business finance options from our panel of lenders and providers, from £1,000 upwards. There is no obligation.
Call or WhatsApp 07777 175890, email sales@josfinserv.co.uk or book a free card fee review.
Jos Finserv Ltd (company no. 14560046) is an independent broker. For business finance we are a credit broker, not a lender, and we may receive commission from providers. Approval and terms depend on your trading history. No obligation.
Sources
Want us to look at your own numbers?
Tell us how to reach you and we will come back with what is actually available for a business like yours. We are paid by the provider, not by you, so this costs you nothing either way.
- We read your current statement and explain it in plain terms
- No obligation, and no pressure to move if you are already well placed
- One conversation, not a sequence of calls
Prefer to work it out yourself first? Use the card fee calculator, or check whether finance is worth exploring.
