Line of Credit vs Overdraft: Which Is Right for Your Business?

A line of credit is a standalone revolving facility you draw from when needed, while an overdraft is a revolving limit attached to your business transaction account. Both charge interest only on what you use, but a line of credit typically costs less (rates from around 8% p.a. compared with 14.55%+ for most bank overdrafts) and can be approved in as little as 24 hours. The right choice depends on how you use the funds.

Why the distinction matters in 2026

Nearly 80% of Australian SMEs reported cash flow disruption in the past 12 months, according to a 2025 CommBank survey. With the RBA lifting the cash rate again in May 2026 and small business variable overdraft rates sitting at 10.51% p.a. on the RBA's own data, the cost gap between these two products is widening. Choosing the wrong one could mean thousands of dollars in unnecessary interest each year.

How each product works

Business line of credit

A business line of credit sits as a separate account from your day-to-day banking. You have an approved limit, and you transfer funds into your operating account when you need them. You repay on your own schedule (subject to any minimum repayment terms), and the limit revolves, so repaid funds become available again without reapplying.

Non-bank lenders typically offer limits from $5,000 to $500,000. Approval can take as little as 24 hours with a non-bank lender, compared with one to two weeks through a major bank. Most non-bank lines of credit are unsecured, meaning no property is required as collateral.

Business overdraft

A business overdraft is built into your transaction account. When your balance hits zero, you keep spending up to the agreed limit. Deposits automatically reduce the drawn amount. There is no separate transfer step because the facility and your operating account are the same thing.

Bank overdrafts typically range from $2,000 to $250,000 for unsecured facilities. Approval usually takes 7 to 14 business days through a major bank. Some banks require a minimum annual turnover (one major bank sets the floor at $75,000 plus GST registration for quick approval).

Cost comparison: the numbers that matter

The table below compares the annual interest cost of a $50,000 facility under three usage patterns. Overdraft rate: 16% p.a. (mid-range for bank overdrafts). Line of credit rate: 12% p.a. (mid-range for non-bank lines of credit). Both products charge interest only on the drawn balance.

Both products may also charge a line fee (sometimes called a facility fee) on the total approved limit, regardless of how much you draw. This typically ranges from 0.5% to 2% p.a. on the approved amount. On a $50,000 limit, that adds $250 to $1,000 per year on top of interest.

The saving narrows if you only use the facility for short bursts, and the convenience of an overdraft (no transfer step, immediate access) may outweigh a few hundred dollars for businesses that dip in and out daily. But for businesses that carry a drawn balance for months at a time, the rate difference compounds fast.

When a line of credit is the better choice

A standalone line of credit tends to suit businesses that need working capital for weeks or months at a time, not just overnight gaps. Common scenarios include:

• Bridging invoice gaps. One in six Australian SMEs lose more than $2,500 per month to late payments. A line of credit covers payroll and suppliers while you wait for invoices to clear.
• Seasonal stock purchases. Retailers and hospitality businesses that buy heavily before peak season and repay from trading revenue over the following months.
• Funding a growth phase. Hiring, marketing spend, or a second location where the outlay runs ahead of revenue for a quarter or two.
• Keeping banking separate. Some business owners prefer a clean separation between their operating account and their credit facility for bookkeeping and cash flow visibility.

When an overdraft makes more sense

An overdraft works best when the cash gap is small and short, and you value the simplicity of a single account. It suits:

• Daily cash flow smoothing. If your account balance dips below zero for a day or two around payroll or supplier payments and recovers when customer payments land, an overdraft handles this automatically.
• Emergency buffer. A small overdraft ($5,000 to $20,000) sitting unused behind your transaction account is cheap insurance, with no interest charged until you draw.
• Existing bank relationship. If your business transaction account, merchant facility, and term loans are all with one bank, adding an overdraft to the same account can be simpler than onboarding with a second lender.

Key differences at a glance

Subject to lender approval, terms, and conditions apply. Rates and limits vary by lender, applicant profile, and security offered.

This article is general information only and is not financial advice.