Overdraft vs revolving credit: which costs less for UK SMEs?
When businesses compare an overdraft to a revolving credit facility, the interest rate is usually the first thing they look at. But it’s rarely the whole picture. The true cost of a working capital facility includes arrangement fees, how interest is calculated, charges for unused availability, and, crucially, what happens when you need access that isn’t there.
This guide breaks down the real cost comparison between a business overdraft and a revolving credit facility for UK SMEs, with illustrative examples to show how the numbers actually play out.
Note: All cost figures and examples below are illustrative, based on typical market terms as of early 2026. Actual costs will vary by lender, business profile, and borrowing history. Always check the specific terms of any product before applying.
The components of working capital facility costs
Before comparing the two products, it helps to understand all the cost elements in play:
Cost ComponentBusiness OverdraftRevolving Credit FacilityArrangement feeTypically 1–2% of limit, charged annuallyVaries — check lender termsInterest rateVariable, typically 5–20% EAR for SMEsFixed or variable — depends on lenderNon-utilisation feeArrangement fee charged regardless of useSome lenders charge, some don’tEarly repayment penaltyTypically noneNone (Juice Flex)Unauthorised limit feeYes — can be significantN/A (no account attached)Renewal/review feeOften yes, charged annuallyTypically at facility renewal
Cost scenario 1: Short-term cover (under 30 days)
Situation: A business needs to cover a £10,000 shortfall for 15 days while waiting for a customer invoice to be paid.
Business overdraft
Assume:
- Overdraft limit: £25,000
- Arrangement fee: 1.5% per annum = £375/year
- Interest rate: 12% EAR
- Daily interest on £10,000: approximately £3.29
Over 15 days: £3.29 x 15 = £49.35 in interest
Plus a share of the annual arrangement fee (even if only used once): £375/year whether used or not.
Total cost of the 15-day draw: £49.35 in interest, with £375/year in baseline facility costs regardless of use.
Revolving credit facility
Assume:
- Revolving credit facility limit: £50,000
- Assume no non-utilisation fee (varies by lender — check terms)
- Interest rate: 18% per annum (illustrative — revolving credit from alternative lenders typically ranges higher than a bank overdraft, but the all-in cost comparison shifts depending on how you use the facility)
- Daily interest on £10,000: approximately £4.93
Over 15 days: £4.93 x 15 = £73.97 in interest
Verdict for short-term, small amounts: The overdraft is cheaper for a quick 15-day draw on a small amount, especially if the arrangement fee is already being paid as part of a banking package. The revolving credit facility costs more in absolute terms for a short, small draw.
If your borrowing need is consistently under £10,000 for under 30 days, the overdraft may well be the more cost-effective option.
Cost scenario 2: Working capital over a quarter
Situation: A business runs a revolving draw cycle, drawing £30,000 at the start of each month and repaying £20,000 mid-month, leaving £10,000 outstanding for the remainder.
Business overdraft
Assume:
- Overdraft limit: £35,000
- Arrangement fee: 1.5% per annum = £525/year
- Interest rate: 12% EAR
- Month 1: £30,000 drawn for 15 days, then £10,000 for 15 days
Interest per month (illustrative):
- First 15 days on £30,000: approx £147.95
- Next 15 days on £10,000: approx £49.32
- Monthly interest total: approx £197
Quarterly interest: ~£591
Plus arrangement fee portion: £131 (one quarter of £525)
Revolving credit facility
Assume:
- Revolving credit limit: £50,000
- Interest rate: 18% per annum (illustrative)
- Same draw pattern: £30,000 for 15 days, then £10,000 for 15 days
Interest per month:
- First 15 days on £30,000: approx £221.92
- Next 15 days on £10,000: approx £73.97
- Monthly interest total: approx £296
Quarterly interest: ~£888
Assuming no additional arrangement fee in this scenario.
The overdraft remains cheaper when the interest rate differential is large. However:
- The overdraft’s arrangement fee is charged on the full £35,000 limit whether drawn or not
- The gap narrows for businesses drawing larger amounts more frequently
- The overdraft limit may be a binding constraint. If the business needs £40,000+ in some months, the overdraft simply can’t serve the need regardless of cost
Cost scenario 3: Large, seasonal draw
Situation: A retail business needs £80,000 for eight weeks ahead of peak season, then repays in full over the following six weeks.
Business overdraft
Many SMEs face an immediate problem here: their overdraft limit is below £80,000. The average UK SME bank overdraft is well below this figure. If the limit is £30,000, the overdraft cannot serve this need at all. Cost becomes irrelevant.
If the business does have an £80,000+ overdraft (rare for most SMEs):
- Arrangement fee at 1.5%: £1,200/year
- Interest on £80,000 for 8 weeks at 12% EAR: approx £1,315
-
Revolving credit facility
A revolving credit facility with a £100,000 limit is much more accessible through alternative lenders.
Verdict for large seasonal draws: The revolving credit facility costs more in interest for equivalent rates and amounts. But the overdraft is often simply unavailable at this scale. Access matters as much as cost. If an overdraft can’t cover the need, it has no cost advantage.
The revolving credit facility also lets the business repay early (and reduce interest costs) as revenue comes in. With no early repayment penalty, repaying over five weeks instead of eight saves weeks of interest.
The hidden costs the interest rate doesn’t show
Arrangement fees on unused facilities
This is where the cost comparison gets counterintuitive. A business paying 1.5% per annum on a £30,000 overdraft limit is paying £450/year, whether they draw £30,000 every month or never draw at all.
If that business draws an average of £5,000/month and pays 12% interest (approximately £600/year in interest), the true annual cost is £1,050, not the £600 the interest rate implies.
A revolving credit facility that charges interest only on drawn amounts, with no ongoing arrangement fee, may have a higher stated interest rate but a lower total cost for businesses that don’t use their facility every month.
The cost of the facility not being there
There’s one cost that rarely appears in financial comparisons: the cost of the working capital facility being unavailable when you need it.
If a bank reduces your overdraft limit during a difficult trading period (which is exactly when many businesses need it most) the cost of scrambling for alternative finance, potentially at higher rates and on compressed timelines, can be considerable.
A revolving credit facility with a committed term means the facility is there for the duration agreed. That certainty has value that doesn’t show up in an interest rate comparison.
Personal guarantee risk
Banks frequently require personal guarantees for SME overdrafts. If the business struggles, the owner’s personal assets are at risk. While revolving credit facilities may also require personal guarantees in some cases, the terms vary by lender and should be understood before any commitment.
Summary: when each product wins on cost
ScenarioLower Cost OptionVery small amounts (under £5,000), under 30 daysBusiness overdraft (lower interest rate, fast access if already in place)Moderate working capital, drawn infrequentlyOverdraft may win — but only if the arrangement fee is absorbed into a broader banking packageLarge amounts (£50,000+)Revolving credit facility — overdraft often can’t cover the need at allSeasonal spike with early repaymentRevolving credit facility — no early repayment penalty, reduces interest costBusiness that draws infrequentlyRevolving credit facility may win if it charges no non-utilisation fee
All figures are illustrative. Actual costs depend on your specific circumstances, lender terms, and credit profile.
Making the right choice for your business
Cost is an important factor, but it isn’t the only one. For businesses choosing between an overdraft and a revolving credit facility, the right questions are:
Juice Flex is a revolving credit facility for UK SMEs — from £25,000 to £1,000,000, subject to status and lending criteria. Interest accrues only on drawn amounts, with no early repayment penalties. Check your eligibility with no impact to your credit score.
For more on this topic, explore our Revolving Credit Vs Overdraft resource hub.