In a nutshell
A business overdraft and a line of credit are both revolving limits where you pay interest only on what you use. The practical difference is where they sit and who provides them. An overdraft is built into your transaction account, usually by a bank, and often needs property security for larger limits. A line of credit is usually a separate facility you draw from, widely offered by non-banks and often sized on turnover without property.
Key points
- Both are revolving: draw, repay, draw again, paying interest on the drawn balance.
- Overdrafts live inside your transaction account; lines of credit usually sit beside it.
- Bank overdrafts lean on property; non-bank lines often rely on turnover.
- Both may charge fees on the limit, whether used or not.
- Overdraft location
- Transaction account
- Line of credit
- Separate facility
- Interest on
- Drawn balance (both)
- Reviews
- Common for both
Ask ten business owners the difference between an overdraft and a line of credit and you’ll get ten answers. Both are revolving limits; both charge interest only on what’s used. The differences are practical — where the money sits, who provides it, what security is needed and how much control you have. This comparison makes them clear.
How do they compare side by side?
| Business overdraft | Business line of credit | |
|---|---|---|
| Where it sits | Inside your transaction account | Usually a separate facility |
| How you use it | Automatically, when the balance goes below zero | You draw funds into your account |
| Typical provider | Banks | Banks and, very commonly, non-banks |
| Security | Often property or a GSA for larger limits | Often unsecured (sized on turnover) or property-secured |
| Typical assessment | Financial statements, tax returns, security | Bank statements, turnover, or property |
| Interest | On the daily overdrawn balance | On the drawn balance |
| Fees | Establishment, limit fees, review fees | Establishment, line fees, sometimes drawdown fees |
| Review | Usually periodic, sometimes on demand | Usually periodic |
Where do they really differ?
Visibility and control. With an overdraft, you’re borrowing whenever the account dips below zero — sometimes without noticing. With a separate line of credit, every draw is a decision. Owners who want tighter control often prefer the line of credit for that reason.
Access without property. Bank overdrafts beyond small limits commonly need property or other security. Non-bank lines of credit are frequently unsecured, sized on turnover and bank statements, which puts them within reach of businesses that don’t own property. Unsecured, cash-flow and line-of-credit options for trading businesses typically range from $5,000 to $500,000.
Stability of the limit. Both can be reviewed and changed. Bank overdrafts are traditionally reviewed each year against updated financials, and a weaker year can lead to a reduced limit. Non-bank lines are reviewed too, often against recent statements rather than annual accounts.
Which should you choose?
Choose an overdraft if:
- your bank offers one on terms that suit you;
- you have property or other security the bank will accept;
- you want the simplicity of one account;
- your financial statements are current and strong.
Choose a line of credit if:
- you don’t have property, or don’t want to use it;
- your latest financial statements understate current trading;
- you want each draw to be a conscious decision;
- your bank’s process is too slow or its appetite for your industry is limited.
If you’re unsure, a specialist can compare both for your cash cycle — there’s no credit check at the enquiry stage.
What do both have in common?
- They suit recurring, self-correcting gaps — not long-term purchases. For those, see working capital loans or equipment finance.
- A permanently drawn balance is a warning sign. If either facility sits near its limit for months, part of the balance probably belongs in a term loan.
- Fees on the limit matter. Compare total cost based on your realistic usage, not just the pricing on drawn funds. See loan fees explained.
How much should the limit be?
Size the limit to your realistic peak shortfall, plus a margin for surprises — not to the largest amount a lender will approve. A useful method:
- Map your cash in and out week by week for a typical year.
- Find the lowest point and how long it lasts.
- Add a buffer for a late-paying customer or an unexpected bill.
A limit sized this way should rise and fall with the cycle, returning towards zero regularly. That pattern is exactly what reviewers like to see.
Terms used in this entry
- Overdraft — a limit that lets a business account go below zero. Glossary →
- Line of credit — a revolving limit you draw and repay. Glossary →
- Undrawn limit — the part of a facility not yet used. Glossary →
- Annual review — the lender’s periodic check of the facility. Glossary →
Worked example (illustrative)
Illustrative only. A florist has a small overdraft from her bank. Wedding season and Mother’s Day create two big stock peaks a year, and the overdraft limit isn’t enough to cover them. The bank wants property security for an increase, and she rents both her shop and her home.
A non-bank line of credit sized on her card and transfer deposits covers the peaks without property. She keeps the small overdraft for day-to-day swings and draws on the line only before each peak, repaying it as sales come in. Each facility does the job it’s best at.
Which revolving limit fits your business?
The right facility depends on your security, your paperwork and how you like to manage cash. The enquiry takes about a minute and there’s no credit check when you first enquire. Your details aren’t fired off to multiple lenders — a real person reviews your cash cycle and calls you. Please describe your turnover and usual shortfall accurately so we can recommend the right limit first time.
Frequently asked questions
Is an overdraft the same as a line of credit?
They work on the same principle and some lenders use the names loosely. The usual distinction is that an overdraft is attached to your everyday account while a line of credit is a separate facility you transfer from.
Which is easier to get without property?
Generally a non-bank line of credit, which is commonly sized on turnover and bank statements. Bank overdrafts beyond small limits often require property or other security.
Which gives better control over spending?
A separate line of credit makes borrowing more visible, because you choose when to draw. An overdraft is used automatically whenever the account goes below zero.
Can I have both?
Yes, though most businesses only need one revolving facility. Having both can make sense where a small overdraft handles daily swings and a larger line covers seasonal needs.