Most directors who reach for short-term business finance reach for one of two things: a short-term business loan, or a business overdraft from their existing bank. Both products promise to fill a cashflow gap. Both are widely advertised. But they're built around different mechanics and they genuinely suit different shapes of need. This article is the side-by-side comparison.
The mechanics
A short-term business loan is a defined lump sum, drawn on a single day, repaid in scheduled instalments over a fixed term. You know the start, the end, the total cost, and each individual repayment up front. The cost is fixed — borrow £300 for 30 days at the agreed rate and the cost is the same whether or not your cashflow improves halfway through.
A business overdraft is a revolving line of credit attached to your business current account. You can take the account balance below £0 up to the limit, at any time. Interest accrues daily on the negative balance, and most banks add an annual arrangement or facility fee on top. The cost is variable — pay back faster, pay less interest. This is the core difference between a business loan and an overdraft: a loan is a one-off lump sum on a fixed schedule, while an overdraft is a standing facility you dip into as working-capital needs rise and fall.
Where the short-term loan wins
- A specific named purchase. If you know you need £4,000 for a piece of equipment on Friday, a short-term loan is the right tool. You know what you're borrowing for, you know exactly what it'll cost, you know exactly when you'll have repaid it.
- Predictability for budgeting. A fixed schedule is easier to plan around than an open-ended overdraft balance.
- Faster to arrange. A short-term business loan from a fintech lender typically goes from application to funds in 24-48 hours; a new business overdraft from a high-street bank typically takes 2-6 weeks.
- Not subject to bank withdrawal. A formal short-term loan can't be "called in" mid-term the way an on-demand overdraft can.
Where the overdraft wins
- Genuinely uncertain need. If you don't know whether you'll need £500 or £5,000, an overdraft sized at £5,000 gives you the optionality and you only pay for what you actually use.
- Lower headline rate. A high-street bank business overdraft is typically cheaper in % terms than a fintech short-term loan — though faster setup, no early-repayment penalties and other features sometimes outweigh that. Always compare the all-in cost (interest plus any arrangement and non-utilisation fees), not just the advertised rate.
- Integrated with your bank account. No separate platform to manage; the overdraft just sits there as part of your existing account.
Where the comparison gets blurry — Credicorp Flex
Credicorp's revolving credit facility (Flex) sits in between. It has the "pay only for what you actually draw" flexibility of an overdraft or business line of credit, combined with the fast-arrange + can-not-be-called-back security of a short-term loan. The headline rate is higher than a bank overdraft, but the per-drawing cap keeps worst-case cost predictable, and the setup time is hours, not weeks. There's a fuller three-way comparison here.
How to choose
Three questions:
- Do you know the exact amount and the exact deadline? Yes → short-term loan. No → overdraft or Flex.
- How fast do you need the facility in place? This week → fintech short-term loan or Flex. In a month → bank overdraft.
- Are you confident your bank won't withdraw the facility at the wrong moment? Yes → bank overdraft is fine. No → fintech short-term loan or Flex avoids that risk.
For a like-for-like cost comparison on a specific scenario, the business loans calculator will show you the £ total. Talk to your bank for an overdraft quote alongside — it's a real comparison worth doing.
Business overdraft line of credit vs a short-term loan
A business overdraft is sometimes described as a "line of credit" because it works on the same draw-repay-redraw principle: you have a facility limit, you use what you need, and you pay interest only on the balance outstanding. A short-term business loan, by contrast, is drawn as a lump sum and repaid on a fixed schedule. The practical difference is that a line of credit suits variable, uncertain needs while a lump-sum loan suits a defined, predictable need. Credicorp's Flex product is a revolving credit facility for limited companies that functions more like a line of credit — draw, repay and draw again within your limit.
Frequently asked questions
What is the difference between a business loan and an overdraft?A business loan is a fixed lump sum drawn on a single date and repaid over a set schedule. A business overdraft is a revolving facility attached to your bank account — you dip into it as needed and pay interest only on the negative balance. The core difference is predictability: a loan gives you fixed repayments and a clear end date; an overdraft gives you flexibility but variable cost.
Is a business overdraft the same as a business overdraft loan?Not quite. An overdraft is a revolving facility; a business overdraft loan usually refers to a short-term loan used as an overdraft substitute — a lump sum drawn to cover a shortfall and repaid quickly. The terms overlap in everyday use, but the mechanics differ: an overdraft accrues interest daily on your running balance, while a loan has agreed-in-advance repayments.
Can I get a business overdraft line of credit as a UK limited company?Yes. High-street banks offer overdrafts to limited companies. Fintech lenders like Credicorp offer revolving credit facilities (Flex) that work on a similar draw-repay-redraw basis without requiring a personal guarantee from the director. Setup time is typically days, not weeks.