The break-even is the interest-free period. If you can clear the balance in full by the statement due date, a business credit card is the cheapest money available to you, at roughly zero. If you cannot, it becomes the most expensive, and an overdraft wins comfortably. There is very little middle ground.
The short version
- A business credit card is either free or the dearest money in your business. Which one depends entirely on whether you pay the closing balance in full.
- An overdraft charges interest from day one, but at a materially lower rate, and it does not punish you for taking longer.
- Cash advances get no interest-free days at all, and usually a higher rate plus a fee. Drawing cash on a card to pay a supplier throws away the card's only advantage.
- On $15,000 held for 45 days, the card costs either about nothing or about $314. The overdraft costs about $259 regardless.
- Use the card for purchases you will clear inside the cycle. Use the overdraft for anything that will still be outstanding next month.
The worked comparison: $15,000 for 45 days
Assume you need $15,000 to cover a supplier bill and expect to be square in about 45 days. Assume a card at 17 per cent per annum on purchases with an annual fee of $150, and an overdraft at 12 per cent per annum with a facility fee of 1.5 per cent on a $20,000 limit.
| Option | Interest | Fees apportioned | Total cost |
|---|---|---|---|
| Credit card, cleared in full within the interest-free period | $0 | around $18 | around $18 |
| Credit card, balance carried | around $314 | around $18 | around $332 |
| Overdraft, drawn 45 days | around $222 | around $37 | around $259 |
| Cash advance on the card | around $388 plus advance fee | around $18 | $420 or more |
The spread between the best and worst row is over twenty times, on the same $15,000, for the same 45 days. That is the whole article.
Why is the card either free or expensive?
Because interest-free days are conditional, and the condition is absolute.
A business credit card advertising up to 45 or 55 interest-free days is describing a maximum, not an average. The count runs from the start of the statement period, so a purchase on day one of the cycle gets the full period and a purchase on the last day gets only the days between statement close and payment due date.
More importantly, the interest-free benefit applies only if you pay the closing balance in full by the due date. Pay $14,000 of a $15,000 balance and you do not get 93 per cent of the benefit. In most cases you get none of it, and interest is charged on the full balance from the transaction date rather than from the due date.
That cliff edge is what makes the card a bad tool for anything you are not certain you can clear. There is no partial credit.
Why is the overdraft steadier?
An overdraft charges interest daily on the balance actually drawn, at a lower rate than a card, with no cliff.
Draw $15,000 for 45 days and you pay 45 days of interest. Draw it for 20 days and you pay 20 days. Draw $8,000 instead of $15,000 and you pay interest on $8,000. It scales smoothly in a way a card does not.
The cost you pay for that is the facility fee, typically charged annually on the limit whether or not you use it. That is what makes an overdraft poor value for genuinely occasional use and good value for recurring use.
There is one structural point in the card's favour worth acknowledging: an overdraft is generally repayable on demand and the limit can be reduced or withdrawn by the lender. That is unlikely in normal conditions but it is a real feature of the product.
Which should you use for what?
The decision is about certainty and duration, not about size.
Use the card when:
- The purchase will be cleared in full inside the statement cycle.
- You want the transaction record and expense categorisation.
- The supplier accepts cards without a surcharge that erases the benefit.
- You are collecting rewards or points and clearing the balance monthly anyway.
Use the overdraft when:
- The gap will run past the statement due date.
- You are not certain when the money is coming back.
- You need cash rather than a card payment.
- The amount is large relative to your card limit.
The surcharge point deserves a mention. Many Australian suppliers pass on card acceptance costs. A 1.5 per cent surcharge on $15,000 is $225, which wipes out most of the interest-free advantage before you have started. Check whether the supplier surcharges before assuming the card is free.
The cash advance trap
If there is one thing to take from this, it is this.
Withdrawing cash on a business credit card, or using it for anything the issuer classifies as a cash-equivalent transaction, typically means:
- No interest-free days at all. Interest accrues from the day of the transaction.
- A higher rate than the purchase rate.
- A cash advance fee, often a percentage of the amount.
Using a card this way removes the only advantage it had and keeps all the disadvantages. If you need cash, an overdraft is the right tool and it is not close.
Some transactions are classified as cash advances without being obviously so, including certain BPAY payments and some payments to financial institutions. If you are planning to use a card for a large payment, confirm how it will be classified first.
What if you need both?
Most established businesses run both, and use them for different jobs.
The card handles the operating rhythm: fuel, subscriptions, travel, small supplier purchases, all cleared monthly. The overdraft handles the timing mismatches: a late customer payment, a quarterly BAS, a stock buy ahead of a season.
The mistake is running the card as though it were an overdraft. A card balance that never gets cleared is a term loan at a card rate, and it is close to the most expensive borrowing a business can hold.
If you are carrying a persistent card balance, that is usually the signal to replace it with an overdraft or a term facility rather than to look for a lower card rate.
Frequently asked questions
Is a business overdraft cheaper than a business credit card?
Only if you carry a balance. If you clear your card in full each month, the card is effectively free and cheaper than any overdraft. If you carry the balance past the due date, the overdraft is normally considerably cheaper.
How many interest-free days do business credit cards give?
Commonly up to 45 or 55 days, but that is a maximum available only on purchases made at the very start of a statement cycle, and only where the closing balance is paid in full by the due date.
Do interest-free days apply to cash advances?
No. Cash advances typically attract interest from the transaction date, at a higher rate than purchases, plus a cash advance fee. Some payments that do not look like cash withdrawals are still classified this way.
Can I have both a credit card and an overdraft?
Yes, and most established businesses do. They suit different jobs: the card for purchases cleared within the cycle, the overdraft for gaps that run longer or where the timing is uncertain.
What if I am always carrying a credit card balance?
That is usually a sign the card is being used as a substitute for a working capital facility. An overdraft or a term facility at a lower rate is almost always cheaper than a persistent card balance.
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