The short version
- A line of credit is a standalone working-capital tool - draw, repay, redraw, usually with higher limits and more lender choice.
- An overdraft is a buffer attached to your bank account - simple, automatic, but usually smaller and controlled by your bank.
- If you'd use it most months, you want the line of credit. If it's a break-glass backstop, the overdraft is enough.
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.
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.
- Get approved for a limit
- Draw funds as you need them
- Pay only on the drawn balance
- Repay, and the limit is there again - no reapplying
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.
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.
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.
That last point matters more than most owners realise. An overdraft is the bank's facility, not yours - if your numbers wobble, it can shrink exactly when you need it most. A business that depends on its overdraft every week is carrying a risk it hasn't priced.
The differences that actually matter
| Feature | Line of credit | Overdraft |
|---|---|---|
| Structure | Standalone credit facility | Attached to your bank account |
| Best use | Ongoing working capital | Short-term buffer |
| Access | Draw when you decide | Automatic when the account dips |
| Repayment | Repay and redraw repeatedly | Repaid as money lands in the account |
| Who offers it | Banks and non-bank lenders | Usually your existing bank |
| Limits | Higher potential | Often lower |
| Control | Yours, for the term | Bank reviews annually, can reduce it |
Five real scenarios
Seasonal stock builds. Retailers and construction businesses buying stock before revenue peaks want the line of credit - the need recurs, and the amounts are too big for a typical overdraft.
The occasional payroll squeeze. Customer payment lands Tuesday, wages go Friday. That's exactly what an overdraft is for.
Growth spending. Hiring ahead of a contract, marketing pushes, bigger jobs - the line of credit's draw-as-needed shape fits spending that arrives in bursts.
Slow-paying customers. Trick question - neither. If the cash you're missing is sitting in unpaid invoices, invoice finance attacks the actual problem.
Paying suppliers upfront. Also neither - trade finance is built to sit between the supplier payment and the stock selling.
Comparing the real cost
Line of credit costs typically stack up as interest on drawn funds, sometimes monthly facility fees, establishment fees, or fees on the unused limit - all lender-dependent. Overdraft costs run as interest on the overdrawn balance plus account and review fees.
The trap is comparing headline rates and ignoring the fee structure. A facility fee on a big unused limit can cost more than the interest you ever pay on drawings. This is exactly the comparison your specialist puts side by side - the true cost of each matched offer, not the advertised number.
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, 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, and you can repay quickly when money lands.
An overdraft is a safety net, not a funding strategy. If you'd use the facility most months, that's a line of credit decision. If you'd barely use it, the overdraft is the cheaper, simpler answer - and we'll tell you so.
Not sure which shape fits your cash flow?
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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.