The short answer
An overdraft sits on your trading account and absorbs shortfalls automatically. It suits day-to-day timing gaps you cannot predict: the week wages fall due before a big invoice lands.
A line of credit is a separate facility you draw from deliberately. It suits larger, planned needs that repeat: buying stock ahead of a season, funding a job before the progress claim, moving on a supplier deal at short notice.
If you are honest about which of those two problems you actually have, the decision mostly makes itself. The rest of this guide is about the details that change the price.
How each one works
Business overdraft
A limit attached to your everyday business account. The account works exactly as it does now, except it can go below zero up to the agreed limit. Interest is calculated daily on whatever the account is overdrawn by, so if you dip in for eight days a month, you pay for eight days a month.
Across our panel, limits run from $25,000 to $2 million, with rates roughly 8% to 20% a year on the drawn balance. Banks sit at the low end and usually want property security. Non-bank lenders can set up an unsecured limit in days and price accordingly.
Business line of credit
An approved limit you draw against when you choose, repay, and draw again without reapplying. It sits apart from your trading account, so nothing happens by itself. You transfer funds in when you need them and clear the balance when the money comes back.
Limits on a line of credit run from around $25,000 to $2 million, with rates roughly 9% to 20% a year on the drawn balance. Most lenders want at least twelve months of trading, and once approved, drawing on the facility is usually same day.
Where the cost actually sits
Both products advertise interest on the drawn balance only. The number that decides whether the facility is good value is the line fee: an annual charge of commonly 1% to 2% on the approved limit, payable whether you use the limit or not.
A $300,000 line of credit with a 1.5% line fee costs $4,500 a year before you borrow a dollar. That is fine if you draw on it regularly. It is money wasted if the limit sits idle, and it is the reason a term loan is almost always cheaper for a single, one-off purchase of a known amount.
Overdrafts carry the same style of fee. The difference is that an overdraft tends to be used constantly in small amounts, so the fee is spread across real usage. A line of credit is only worth its fee if the draws are large or frequent enough to justify it.
The rate is not the only thing to compare
When you get two quotes, add the line fee to the interest you expect to pay on your realistic usage, then compare totals. A lower rate with a higher line fee can cost more over a year than the reverse, depending on how you actually use the money.
Which one fits which business
- Trades and subcontractors paid on progress claims, with wages and materials due weekly, usually want an overdraft. The gap is constant and unpredictable in size.
- Retailers and wholesalers buying stock ahead of a season usually want a line of credit. The draws are large, planned and repeat every year.
- Project-based businesses that fund each job upfront and clear the balance when the claim lands are a classic line of credit case.
- Businesses with a single lumpy purchase and no repeat are better off with a term loan than either product.
- Businesses that never quite get back to zero are a warning sign for both. If the balance sits permanently drawn, the facility is being used as core debt, and a term loan with an end date is the right structure. Lenders notice this at the annual review, and it is when limits get reduced or pulled.
Can you have both?
Yes, and some businesses do: an overdraft for day-to-day swing and a line of credit for larger planned draws. Both lenders will see both facilities on your bank statements, so the pair needs to make sense as a package rather than look like stacking. Sequencing matters here. Which facility is set up first, and with whom, affects what the second lender is prepared to approve.
What lenders look at
For an overdraft, account conduct comes first: dishonoured debits, how often the balance runs down, and whether it swings back up. For a line of credit, lenders want trading consistency across at least twelve months and a coherent reason for the limit, rather than a general appetite for headroom. In both cases, property security increases the limit and lowers the rate, and existing lender debits on the account narrow your options quickly.
A quick decision test
- Is the gap unpredictable and small relative to turnover? Overdraft.
- Is the need large, planned and repeating? Line of credit.
- Is it a one-off purchase with a known amount? Term loan.
- Will the balance ever return to zero? If not, none of the above. Talk to us about a facility with an end date.
If you are still not sure, tell us what the money is for and what your bank statements look like over a normal month. The structure usually becomes obvious inside a five-minute conversation, and it costs you nothing to ask.