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When your bank cuts your overdraft: a 30-day plan to replace the headroom

What to do when your bank cuts your overdraft: work out the cash gap, talk to the bank, and four ways to replace the headroom within 30 days.

Reading time 5 min read

Category Business guides

Written by The bizbritain team

If your bank cuts your overdraft, start by working out how much cash you will be short and when. Then talk to the bank before the new limit applies, and ask whether the cut can be phased. Use that time to replace the headroom with finance that suits how money moves through your business.

You are not on your own. According to Bibby Financial Services' SME Confidence Tracker, published on 5 October, 32% of small firms using or considering finance had credit lines reduced by lenders in the past six months. A quarter had a funding application declined.

This guide is for an owner whose business is trading and already borrowing, and has just lost some of its room to manoeuvre. It covers why limits get cut, what to do in the first 30 days and four ways to replace the money.

Section 01

Why do banks cut overdraft limits?

An overdraft is flexible, and that cuts both ways. According to the British Business Bank, your bank can demand repayment of a business overdraft at any time.

Many business overdrafts are also reviewed when they come up for renewal, often once a year. That review is where a cut often happens.

Banks do not always give a full reason. Common triggers include:

Lower turnover: your latest accounts or bank statements show less money coming in than last year.
A hard-core balance: the account sits at or near its limit for months, so the overdraft looks like long-term borrowing.
Sector caution: the bank has decided to lend less to businesses like yours, whatever your own figures say.
Late-paying customers: money arrives later, so the account spends longer overdrawn.

A cut is one lender's view at one point in time. It is not a verdict on whether your business can borrow.

Section 02

Your first 30 days after the bank cuts your overdraft

The aim of the first month is simple. Know your numbers, keep the bank talking and have a replacement ready before the new limit bites.

Week 1

Work out the gap

Build a 13-week cash flow forecast. List what comes in and what goes out each week, including wages, rent, VAT and supplier bills.

The lowest point in that forecast, under the new limit, is the amount you need to replace.

How much will you be short, and in which week?

Week 2

Talk to the bank

Read your facility letter first. It sets out the limit, the review date and what the bank can change.

Ask why. The reason tells you what another lender will look at.
Ask for time. A cut phased over a few months is easier to manage than one that applies at once.

Weeks 3–4

Get the paperwork ready

Any new lender will want recent accounts, up-to-date management figures, your forecast and a list of who owes you money.

Having these ready is what keeps a replacement quick.

Section 03

Four ways to replace the headroom

The right route depends on why the money runs short. Here are the four most common.

Invoice finance, if customers pay late
A lender advances most of the value of your unpaid invoices, so you are not waiting for customers to pay. According to Bibby's tracker, 60% of small firms say customers take longer to pay than a year ago. Our guide to late payments and invoice finance explains how it works.
A term loan for the hard-core balance
If part of the overdraft never gets paid off, it is really long-term borrowing. A loan with fixed monthly repayments can clear that part, leaving a smaller overdraft for everyday swings. Our guide to business debt consolidation shows how to compare the cost.
Asset finance on equipment you own
Some lenders will lend against vans, machinery or equipment the business already owns. That can release cash without adding to the overdraft.
Lending backed by the Growth Guarantee Scheme
The scheme can back overdrafts, term loans, asset finance and invoice finance of up to £2m. The guarantee goes to the lender, not to you. You remain fully liable for the debt, and the lender makes the decision.

None of these is guaranteed. Each lender applies its own checks to your accounts, your forecast and your track record.

Section 04

Why another lender may see it differently

Banks set their own limits on each sector and each type of borrowing. A business one bank wants to lend less to can look very different to a specialist lender or an invoice finance provider.

A broker can take your forecast and accounts to a wider range of lenders at once. If your limit has been cut, talk to us about growth finance and we will look at what fits the gap.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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