Business overdraft vs line of credit: close cousins, different habits

Here’s the quickest way to tell them apart: look at where the money lives. With an overdraft, it lives in the account you already trade from. Your balance just keeps falling below nil to a pre-set limit, then recovers as sales are banked. With a revolving line, the money sits in a separate account. You move funds across when you need them and send repayments back.

That one design choice drives almost every other difference: who offers each product, how repayments work, and how easy it is to lose track of what you owe.

How do they compare feature by feature?

	Overdraft	Line
Location	Built into the account you trade from	A separate facility linked to your account
How you draw	Just keep paying bills; the balance goes negative	Transfer funds across, online or by request
How it’s repaid	Every deposit reduces the debt automatically	Repay manually or on a schedule; some lenders set terms per draw
Who offers it	Mostly banks, plus a few non-banks	Banks, non-banks and fintech lenders
Security	Larger bank limits often secured by property	Unsecured up to a threshold; property for larger limits
Fees	Interest while overdrawn, with monthly account or limit charges	Interest on whatever’s drawn, with a line or service charge on top
Review	Typically annual	Periodic; varies by lender
Visibility	Easy to blur everyday spending with borrowing	Debt shows up as a separate balance

Why the bank usually owns the overdraft

Since an overdraft is part of the transaction account, it generally comes from whoever holds that account. If you bank with one of the majors, the overdraft comes from them too. That makes it hard to shop around for an overdraft without moving your whole banking relationship.

Lines come with no such strings. You can keep your everyday account where it is and take a line from a different bank or a non-bank lender. That flexibility matters because, as the RBA’s October 2025 small business bulletin observed, non-banks have taken a growing share of SME lending since 2022, particularly in smaller loans. A lot of that competition shows up as unsecured lines sized on turnover.

When a bank offers you a well-priced overdraft, especially one backed by property, it’s usually excellent value for working capital. Accept it gratefully. The question is what to do when it isn’t on the table.

How does repayment really differ?

Overdrafts repay themselves. Every sale that lands in the account reduces the overdrawn balance. There’s often no minimum repayment while you’re within the limit. That’s convenient, and it’s also the danger: the business can drift along overdrawn for years without anyone deciding to borrow long term.

Lines need a decision. You draw a set amount and choose when to send it back. Some non-bank lines go further and treat each draw as a small loan, repaid in weekly instalments over a set number of months. That adds structure. It also means a busy period of draws can stack up several repayment streams at once, so keep an eye on the total weekly outgoing.

Want to know if a line could replace a declined overdraft? Send us a short enquiry and a specialist will go through the options.

The “never in credit” warning sign

Banks sometimes call it hardcore debt: the part of an overdraft that never gets repaid because the balance never climbs back above zero. Business.gov.au suggests overdrafts are for short-term cash flow gaps rather than buying assets or long-term funding, and that guidance applies equally to lines.

If your facility has sat near its limit for a year, it’s no longer smoothing timing gaps. It’s funding something permanent, perhaps an earlier equipment purchase, a loss-making stretch or a tax bill. Two problems follow. You’re paying revolving-facility pricing on what is effectively term debt, and the lender can shrink the limit at review, which pulls the rug out precisely when you’re stretched.

The fix is usually to move the stuck portion onto a term loan and keep a smaller revolving limit for genuine swings. How to divide the two is covered in our comparison of lines of credit and term loans.

What notice do you get if the limit changes?

For bank facilities, the 2025 Banking Code of Practice requires banks to give small business customers prior notice of unfavourable changes, with exceptions for things like a material and immediate risk. Bank overdraft terms commonly spell out a written notice period before a limit is cut or cancelled. Non-bank lines sit outside the code, so the contract is what counts. Before signing either, find the clauses on review, reduction and repayment on demand.

When does an overdraft win?

• Your existing bank is willing to set one up at a fair price.
• You can provide property security and want the lowest-cost revolving facility.
• Takings arrive daily and you like the idea of every deposit cutting the debt without lifting a finger.
• Your dips are small, short and frequent, such as weekly supplier runs.

When is a line the stronger option?

• Your bank won’t offer an overdraft, or has refused an increase.
• You want to keep borrowing visibly separate from trading money.
• You’d like a facility from a lender other than your bank.
• You need a larger, occasional draw, such as stock for a peak season, rather than tiny daily dips.

If unpaid invoices are the main cause of your shortfall, compare invoice finance against an overdraft as well, since it grows with your sales rather than sitting at a fixed limit.

Before you choose, check

1. How often will you dip? Daily and small favours an overdraft; occasional and larger favours a line.
2. What are the limit fees? Ask for the yearly cost of the facility with nothing drawn.
3. What triggers a review or reduction? Get it in writing.
4. Can you show the balance coming back up? Run your figures through the working capital ratio calculator.
5. Is any part of the balance really long-term debt? If so, term it out.

Need a facility that flexes with your cash?

Both facilities are there so that a sound business isn’t derailed by when the money happens to arrive. If your bank has said no, cut your limit or simply doesn’t offer what you need, there are usually other ways to set up a revolving facility.

Sending an enquiry is quick, around a minute, and nobody pulls your credit history at that stage. We keep your information to ourselves instead of circulating it to a stack of lenders, and you’ll hear from an actual person who has read your circumstances. The more accurately you describe turnover, current facilities and how deep the dips get, the sooner we can match the right fit.

See what revolving funding could look like →