Working capital
Business line of credit vs overdraft
Two revolving facilities that look identical from a distance. The real differences are where the facility lives, who offers it, and what you pay to hold the limit.
A business overdraft and a standalone line of credit do the same job: a revolving limit you dip into when cash runs short and repay when it recovers, with interest charged only on what you use. From a distance they are the same product, which is why the choice is often made by default rather than on the differences.
The differences are real, though. An overdraft is attached to your business transaction account and traditionally comes from the bank you already use. A standalone line of credit is a separate facility, offered by banks and non-bank lenders, that you draw into your account as needed. Where the facility lives changes who will offer it to you, how it is reviewed, and what you pay to hold the limit.
The options
What each one actually is
-
Business overdraft
Attached to your business transaction account, so it kicks in automatically when the balance passes zero. Traditionally bank-issued, and often secured or subject to periodic review.
- Suits
- Overnight and short gaps inside your everyday banking, where convenience and automation matter more than shopping the facility around.
- Watch out for
- The bank can reduce or withdraw the limit on review, and fees are usually charged on the limit whether you use it or not.
-
Standalone line of credit
A separate revolving limit you draw into your account, offered by banks and non-bank lenders, in secured and unsecured versions.
- Suits
- Gaps that run weeks or months: stock cycles, seasonal trade, slow-paying customers. Also the usual next step when the bank has capped or declined an overdraft.
- Watch out for
- A line or service fee is usually charged on the whole limit, and facilities are reviewed periodically. It is working capital on terms, not permanent capital.
At a glance
Side by side
| Business overdraft | Standalone line of credit | |
|---|---|---|
| Where the facility sits | Inside your transaction account | A separate facility you draw into your account |
| Who typically offers it | Mainly banks | Banks and non-bank lenders |
| Interest charged on | The overdrawn balance | The drawn balance |
| Ongoing fee on the limit | Usually | Usually |
| Security | Often required, or reviewed periodically | Secured and unsecured versions exist |
| Typical approval path | Your existing bank | A broader panel of lenders |
| Best for gap length | Days | Weeks to months |
How to actually choose
The honest answer
If your gaps are overnight and your bank relationship is good, the overdraft attached to your account is hard to beat for convenience. It is already wired into the way you bank, and it clears itself the moment money lands.
If the gaps run longer, or the bank has capped the overdraft or said no, the standalone market is wider than most owners realise. A line of credit does not have to come from the bank that holds your transaction account, so you can compare lenders on it without moving your banking, and that is where a panel earns its keep.
Neither is free while unused. Both usually charge a fee on the limit whether you draw it or not, so hold the smallest limit that genuinely covers the gap, and decide on the figures you have actually been quoted rather than on feel.
FAQs
Common questions
Is a business overdraft the same as a line of credit?
Structurally they are near enough the same product: a revolving limit, interest on what you use, a fee for the availability. What separates them is placement, provider and pricing. An overdraft lives inside your transaction account and generally comes from your bank. A standalone line of credit is its own facility, from a wider market of banks and non-bank lenders, so it can be compared and replaced without touching your everyday banking.
Can I get a line of credit without moving banks?
Yes. A standalone line of credit is a separate facility, so it does not require you to switch your transaction banking. You draw from it into the account you already run. That is one of the main reasons businesses add one when their bank will not extend the overdraft: the comparison happens without unpicking the banking relationship.
Why would I pay a line fee on money I have not drawn?
Because the lender is holding the money available for you whether you use it or not, and availability has a cost. The fee is the price of being able to draw at short notice without applying again. It is also the reason an oversized limit is a quiet leak: size the facility to the gap it actually covers, not to the biggest number a lender will approve.
Can the bank reduce or cancel my overdraft?
Yes. Overdrafts are typically repayable on demand and reviewed periodically, which means the limit can be reduced or withdrawn at review, and that decision belongs to the bank. It does not happen often to well-run accounts, but it is a real risk worth planning for, and it is one of the more common reasons a business adds a standalone facility alongside its banking.
The right answer depends on your numbers.
A comparison page can show you the shape of the decision. Which option is actually cheaper for your business depends on what the lenders would offer you, and that is the part we do.
An enquiry is a conversation, not an application. We won't submit anything to a lender without your say-so.