Sources said the cut had been achieved by increased donations, mainly from small businesses, and individual donors opposed to Labour policies for a minimum wage and workers' rights under the European social chapter.
Some sources said pounds 18m had been received in donations over the past 12 months, from small businesses rather than large companies.
"A range of people are giving sums which are substantial but not massive."
The size of the overdraft reduction is certain to lead to speculation about the identity of the donors, who are being kept a secret by the party. Labour has protested at the Tories seeking financial support from foreign backers but the sources confirmed an Independent report that more money is being raised in regional fund-raising events, including key businessmen in Yorkshire.
For the first time, a source admitted the party was near bankruptcy in 1993.
"We wondered whether we could pay the staff ... on two occasions, when we thought we could go bankrupt." The turn-around was achieved by staff cuts at Conservative Central Office but the party chairman, Brian Mawhinney, said an increase in donations had reduced the overdraft with the Bank of Scotland.
The bank allowed the overdraft against the leasehold on the party's Smith Square headquarters - it sold the freehold in the 1980s - and never called in the loan.
Sources said that the bank was now "more relaxed".
"It means we will have a great deal more room for manoeuvre in the general election campaign. At the last election, we were dealing with a deficit of pounds 11m; it was one of the reasons why we opted for a poster campaign and not advertisements in newspapers. It means we can be much more flexible in our campaign next time," said the source.
The overdraft cut came as Tory activists warned membership was in decline. Graham Pycock, a member of the Dulwich and West Norwood Tories, and press officer of the Tory Charter group, said Labour Party membership was set to exceed Tory membership for the first time.
The Charter group is campaigning for one-member-one-vote democracy in the Tory Party, like Labour, to raise its membership.