Line of credit vs overdraft: which one does your cash flow actually need?

Choosing between a business line of credit and an overdraft is one of the most common cash flow decisions Australian business owners get wrong - not because either product is bad, but because they look interchangeable from the outside. Both are flexible. Both charge you only on what you use. The difference is in who controls the facility, how big it can get, and what job it's actually built for.

This guide covers what each one is, what they cost in practice, five situations with the actual numbers, what you need to qualify, and what happens when the bank reviews your facility.

What a line of credit is

A line of credit is a reusable funding facility. You're approved for a limit, you draw funds when you need them, pay interest only on what's drawn, and the credit becomes available again as you repay.

1. Get approved for a limit
2. Draw funds as you need them
3. Pay only on the drawn balance
4. Repay, and the limit is there again - no reapplying

It sits separately from your transaction account. You move money across when you need it, which means it works regardless of who you bank with. That separation is the point: the facility is a standalone credit agreement with its own term, not a feature bolted onto an account.

Its strengths: flexibility, reusability, and reach - both banks and non-bank lenders offer them, which usually means higher potential limits and faster assessment. Its weak spots: some lenders add monthly or facility fees on the limit itself, and the flexibility punishes undisciplined use. A line of credit that never returns to zero has quietly become a term loan with a worse rate.

A revolving credit facility is the same structure under a different name. Larger businesses and corporate lenders tend to use that term; smaller facilities are usually marketed as a business line of credit. The mechanics - approved limit, draw, repay, redraw - are identical.

What an overdraft is

A business overdraft lives inside your bank account. The bank approves a limit, your balance can run below zero up to that limit, and incoming payments automatically pull you back up. Nothing to draw down, nothing to manage.

That automation is genuinely useful. A supplier direct debit hits on a day your account is short, the overdraft absorbs it, and Thursday's customer payment clears the balance. You never log in, never request anything, never think about it.

Its strengths: simplicity - it's just there when the account dips. Its weak spots: it's usually only available from your existing bank, limits tend to be smaller, it's reviewed annually, and the bank can reduce or cancel it if your position changes.

The differences that actually matter

Two of those rows do most of the work.

Who offers it decides how much competition you get. An overdraft comes from the bank you already use, so the terms are whatever that bank offers. A line of credit can come from any lender willing to write one, which means the offers compete.

Control decides what happens when things get difficult. A line of credit runs for its agreed term. An overdraft is reviewed, and a review is a decision the bank makes about you, on their timetable.

Five real scenarios

Seasonal stock builds. A homewares retailer buys $180,000 of stock across September and October, sells it down through November and December, and is back to a normal inventory position by late January. The drawn balance rises through spring, peaks before the trading period, and falls as the stock converts. That's four months of interest on a balance that steps down, on a facility that will do exactly the same thing next year. It's a line of credit. The amount is beyond most overdraft limits, and the pattern recurs, so paying to have the limit sitting there is worth it.

The occasional payroll squeeze. A services business runs on 30-day terms. A client's payment lands Tuesday, wages go out Friday, and roughly three times a year the timing slips and the account is $15,000 short for four days. Total exposure per event: four days of interest on $15,000. An overdraft is exactly right here. A line of credit with a monthly facility fee would cost more in the nine months you didn't use it than the overdraft costs across the whole year.

Growth spending. A contractor wins a job that requires two additional crew hired six weeks before the first progress claim. Payroll starts immediately, revenue starts in week seven, and the same shape repeats each time they win work. The spending arrives in bursts, at meaningful size, on a schedule the business controls. A line of credit fits - you draw against a known event rather than reacting to an account dipping.

Slow-paying customers. A recruitment agency pays contractors weekly and gets paid on 45-day terms, with $220,000 permanently outstanding. Trick question - neither product is the answer. Borrowing against a working capital facility to cover a receivables gap means paying interest on money you have already earned, and the gap never closes because the underlying timing never changes. Invoice finance attacks the actual problem by advancing against the invoices themselves, and the limit grows as the debtor book grows.

Paying suppliers upfront. An importer's supplier wants payment before the container ships, and the stock sells 90 days after it lands. Also neither. Trade finance is built to sit in exactly that window, and it's usually cheaper than a working capital facility because the goods and the trade cycle form part of the structure.

The pattern across all five: match the product to the shape of the gap, not to how much you need. Recurring and planned points to a line of credit. Occasional and reactive points to an overdraft. And if the gap is created by invoices or supplier terms, the right answer is a different product entirely.

What it actually costs

Most comparisons stop at the interest rate. The rate is rarely what decides which facility is cheaper.

Line of credit costs stack up as interest on the drawn balance, plus in many cases an establishment fee, a monthly or annual facility fee, and sometimes a line fee charged on the undrawn portion of the limit.

Overdraft costs run as interest on the overdrawn balance, plus account keeping fees and an annual review or renewal fee.

Here is why the rate is the wrong thing to compare. Take a $100,000 limit you expect to draw on for two months a year at an average balance of $40,000.

On a line of credit, you pay interest on $40,000 for two months, plus the ongoing facility fee for twelve. On an overdraft, you pay interest on $40,000 for two months, plus account fees for twelve. If the line of credit's facility fee is charged on the full limit rather than the drawn balance, you can be paying more in fees on money you never touched than in interest on money you did.

Flip the usage to eight months a year and the arithmetic reverses. The facility fee is now spread across far more borrowing, the higher limit is doing real work, and the overdraft would have been too small anyway.

What you need to qualify

Both products are assessed on the same fundamentals: how long you've traded, what your revenue looks like, how your accounts are run, and whether there's security available.

For an overdraft, your bank is assessing a customer it already has. That cuts both ways - it can already see your account conduct, which speeds things up, but it also means your entire banking relationship is part of the decision. Most banks want at least two years of trading and will look closely at how often the account runs at or near zero.

For a line of credit, the assessment is standalone. Non-bank lenders on our panel typically want six to twelve months of trading, consistent revenue, and clean recent bank statements. Because the facility isn't tied to your transaction account, you can hold one alongside your existing banking without disturbing anything.

Newer businesses generally find a line of credit easier to obtain than an overdraft, which is the reverse of what most owners expect. A bank is unlikely to extend an overdraft to a business it has banked for eight months. A non-bank lender assessing six months of revenue on its own merits often will.

What happens at the annual review

This is the part that rarely gets written down, and it's the single biggest structural difference between the two products.

An overdraft is granted for twelve months and then reviewed. At review, the bank looks at your current financials, your account conduct over the year, and its own appetite for your industry. It can renew the limit, reduce it, add conditions, or withdraw it.

The difficulty is the timing. Reviews assess the year that just happened, so a business that had a hard year gets reassessed precisely when the buffer matters most. Nothing improper is happening - the bank is doing what the facility always allowed. But a business that has been running on its overdraft for eighteen months and treats it as permanent working capital can find that permanence isn't a feature it was ever sold.

Warning signs that a review may go against you: sitting close to the limit most of the month, the balance rarely returning to positive, declining revenue in the reviewed year, or your bank stepping back from your sector generally.

A line of credit doesn't remove risk, but it moves it. The facility runs for its agreed term on agreed conditions, and you know when it ends because it's in the contract rather than in an annual assessment.

If your bank has already said no

A declined overdraft application, or a reduced limit at review, doesn't mean the business isn't fundable. It usually means one lender's policy didn't fit, and bank policy is narrower than the market.

Non-bank lenders assess differently. Many weight recent trading and cash flow more heavily than balance sheet strength or property security, which is why a business with strong revenue and no property can be declined by a bank and approved by a non-bank lender in the same week. Limits are often comparable, approval is usually faster, and the facility sits outside your existing banking.

The trade-off is honest: non-bank pricing generally sits above bank pricing. If your bank has approved an overdraft on terms you're happy with, take it. This is the answer when the bank has said no, can't help further, or can't decide inside a timeframe that's useful to you.

Which one should you choose?

Choose the line of credit when you need ongoing access to working capital, your revenue is seasonal or lumpy, you want the funding in place before you need it, you need a limit larger than your bank will extend, or you want more than one lender competing for the deal.

Choose the overdraft when you only need occasional short-term support, you want a simple buffer on the account you already have, you can repay quickly when money lands, and your bank's pricing is competitive.

Choose neither when the gap is caused by unpaid invoices or supplier payment terms. Those have their own products, and using a general working capital facility to patch them is more expensive and doesn't fix the cause.

Common questions

How do business overdrafts compare with lines of credit in Australia?

The core difference is control and reach. An overdraft is attached to your bank account, comes from your existing bank, tends to carry a smaller limit, and is reviewed annually. A line of credit is a standalone facility available from banks and non-bank lenders, generally supports higher limits, and runs for an agreed term. Overdrafts suit occasional short-term gaps; lines of credit suit recurring working capital needs.

How does a revolving credit facility compare to an overdraft?

A revolving credit facility and a business line of credit are the same structure - the term is more common in corporate lending. Compared to an overdraft, it's a separate agreement rather than an account feature, generally supports larger limits, and isn't subject to an annual bank review of your whole position.

Can a new business get a line of credit?

Often, yes, and more easily than an overdraft. Non-bank lenders on our panel typically look for six to twelve months of trading with consistent revenue, and assess the business on its own merits rather than on an existing banking relationship. Limits for newer businesses start smaller and grow with trading history.

How do I get a business line of credit?

You'll need recent business bank statements, basic financials, and your ABN and trading details. With a non-bank lender the assessment usually takes days rather than weeks. Applying across multiple lenders at once lets you compare real offers rather than advertised rates - which is what a single application through a panel is for.

Can I have both?

Yes, and some businesses should. A modest overdraft handles day-to-day timing on the transaction account, while a line of credit funds planned, larger, recurring needs. The thing to check is whether either lender restricts additional facilities, and whether you're paying two sets of ongoing fees for capacity you'd get from one.

Which one is cheaper?

Whichever one matches your usage. At low, occasional usage the overdraft almost always wins because there's less fixed cost sitting on an undrawn limit. At sustained usage the line of credit usually wins, because the fees are spread across far more borrowing and the limit is large enough to do the job.

Does applying affect my credit file?

Checking your options doesn't. A credit check only happens if you choose to formally proceed with a lender.

General information only - it doesn't take your situation into account. Consider whether a product suits your business before acting, and get independent advice where you need it. No credit check to see your options. A credit check only happens if you choose to formally proceed with a lender.