Business Overdraft vs Line of Credit: Which Fits Your Cashflow Shape?
Cashflow Chooser
Business owners · Working capital · Comparison guide
Every comparison of these two ends in "it depends on your needs", which is a way of not answering. It does not depend on your needs. It depends on what your balance actually does over a quarter, and there are only a handful of shapes it can take, one of which means the answer is not a facility at all. This guide matches each shape to the facility built for that movement, and shows you how to read the answer off your own bank statements.
Quick Answer
Neither is better. Both are revolving facilities: a limit you can draw, repay and draw again without reapplying. A business overdraft fits a balance that dips below zero and recovers on its own, because the limit sits inside the transaction account. A business line of credit fits lumpy, deliberate draws, because a standalone facility keeps them visible and separate from trading. If neither describes your balance, neither product is the right tool. Before signing a non-bank facility labelled line of credit, check whether each draw repays on a schedule.
| Your question | Short answer |
|---|---|
| Is one better than the other? | No. The decision is made by usage shape, not by features. Constant oscillation around zero points to an overdraft; lumpy, deliberate draws point to a line of credit. |
| Are they the same product? | Sometimes literally yes. Several non-bank at-call facilities are sold under both names. Three things decide it: account attachment, repayment character and review basis. |
| What actually separates them? | Where the facility lives and how money physically leaves it. An overdraft sits inside the transaction account and is drawn by payments simply going out. A line of credit sits beside it and is drawn on request. |
| Do both charge interest only on what you use? | Both are normally priced on the drawn balance rather than the limit, so the cost of holding one unused is a fee question rather than a rate question. Fee structures differ, and the cost comparison is handled in the hub guide rather than here. |
| Does either have set repayments? | An overdraft never does: it is repaid by deposits landing. Some facilities sold as lines of credit do, with each draw reduced on a schedule, which is the amortising trap. |
| How is each one reviewed? | An overdraft is normally reviewed as part of the account relationship, on conduct. A standalone facility is reviewed as a facility, on its own limit and terms. Both can be reduced. |
| Where does a business credit card fit? | Beside both, not against them. Interest free days are a purchases mechanic that only works if the balance is cleared in full, and they do not extend to cash taken out. |
| Can I have both at once? | Yes, and for some businesses that is the right structure: a small overdraft as the buffer on the trading account, a separate facility for planned draws. |
Is it better to use overdraft or line of credit?
Neither is better, and the reason every article you have read on this ends in "it depends on your needs" is that features are the wrong axis. Both are revolving facilities, meaning a limit you can draw, repay and draw again without reapplying, with interest charged on what is drawn rather than on the limit. Compare them feature by feature and they converge. This page is the full chooser that our business overdraft guide summarises, and it decides the question on a different axis: what your balance actually does.
Also called: line of credit vs overdraft, overdraft credit line, business overdraft line of credit, difference between business overdraft and line of credit.
Three lines, and they are the whole answer. If your balance dips below zero constantly and climbs back on its own, take the overdraft, because the facility lives inside the account where the dips happen and clears itself without you doing anything. If your draws are lumpy, deliberate and sized, take the line of credit, because a standalone facility keeps a stock purchase visible as a stock purchase instead of burying it in the trading account. If neither describes you, the answer is probably not a revolving facility at all, and the last two rows of the table below say what it is instead.
| Your usage shape | Best-fit facility | Why it fits | Where it breaks down |
|---|---|---|---|
| Constant oscillation around zero. The balance crosses zero several times a month and recovers by itself | Business overdraft | The limit sits inside the account the movement happens in. Payments go out whether the balance is positive or negative, and incoming deposits repay the drawn amount automatically. Nothing is transferred, requested or scheduled | When the balance stops recovering. An overdraft that is drawn every day of the quarter is not a buffer any more, it is a term debt with no repayment plan, and a reviewer will read it that way |
| Lumpy, irregular draws. Long flat periods, then a deliberate, sized draw for stock, a job, a wage run or a tax bill | Business line of credit | A standalone facility keeps each draw visible, attributable and separate from trading. You decide when to draw and how much, which suits a spend you can name in advance | When the draws are actually continuous. If you are transferring from the facility every week to keep the trading account afloat, you have rebuilt an overdraft with extra steps |
| One defined outlay. A single known amount, for a known thing, with a known useful life | Term loan (comparison only) | A defined outlay has a defined repayment. Amortising it over a set term matches the cost to the benefit and takes the decision off your desk. Depth sits on the business loans page rather than here | When the "one outlay" turns out to be the first of several. Repeat needs point back at a revolving facility, because reapplying each time is the expensive part |
| Receivables heavy. The cash exists, it is sitting in issued invoices that have not been paid | Invoice finance (comparison only) | The gap is a timing gap in your own ledger, so the facility that fits is one secured by the ledger. The limit tends to grow with sales instead of being reset by a reviewer. Depth on the invoice finance page | When the receivables are concentrated in one or two debtors, or when the ledger is disputed or slow-paying, both of which change what a funder will advance against |
Read the fourth column, not the second. Every one of these facilities works when it is matched to its shape, and every one of them fails in a specific, predictable way when it is not. Most of the trouble we see on cashflow files is a facility doing a job it was not built for, not a facility that was a bad product.
Are line of credit and overdraft the same?
Sometimes literally yes, and the market line that they are "mostly the same product" is true often enough that it is worth taking seriously rather than dismissing. Plenty of non-bank at-call facilities are sold under both labels, with the same limit, the same drawn-balance pricing and the same documentation, and the only difference is which word the lender's marketing team chose. If you are comparing two term sheets and they describe the same mechanics, the difference in the name is not telling you anything.
What that line never does is give you a way to check. Here is the three part test, and any one of the three coming back different means you are looking at two different products rather than one product with two names.
- Account attachment. Is the limit attached to the transaction account you already operate, so that a payment overdraws it, or is it a separate facility you draw from? If it is attached, it is an overdraft in substance whatever the term sheet calls it.
- Repayment character. Is the facility evergreen and at-call, so that money coming in reduces the balance and nothing is scheduled, or does each draw carry a repayment schedule that reduces it whether or not you want it reduced? This is the limb that most often comes back different, and the amortising trap is about exactly this.
- Review basis. Is the facility reviewed as part of your account relationship, on how the account has behaved, or as a facility in its own right, against its own limit and terms? The two produce different conversations and different notice.
When the two labels really are one product
- All three test limbs return the same answer on both term sheets
- The facility is at-call with no scheduled reduction of any draw
- Interest is charged on the drawn balance and calculated daily
- The limit is reviewed periodically rather than expiring on a date
- Choosing between them is then a pricing and service question, not a structural one
When the label is hiding something
- The "line of credit" has a stated maximum term by which it must be repaid in full
- Each drawdown carries its own repayment schedule
- The facility expires on a date rather than being reviewed
- The "overdraft" is not attached to any account you can transact from
- The answer to "what happens if I never repay a draw" is a number, not a review
There is also a reason the two words map so cleanly onto two channels, and it is worth understanding because it shapes what you get offered before you have said anything about your business. A bank leads with the overdraft because the overdraft sits on the transaction account the bank already holds. It has your account conduct, it has the deposit history, and attaching a limit to an account it already administers is the cheapest facility it can write. A non-bank lender usually does not hold your transaction account, so it cannot attach anything to it, which is why non-bank cashflow products are standalone facilities and why they get called lines of credit. The label often reflects who is selling it rather than what it does. Our guide to business lines of credit covers the standalone product in its own right.
One reader this comparison serves is not choosing a first facility at all, but already holding one and weighing a switch, usually from a bank overdraft to a non-bank line of credit. Run the three part test on both term sheets before anything else, because if all three limbs match you are paying switching costs for a rename. If you do switch, sequence matters: the new lender reads your statements with the old facility's conduct still in them, and running down or closing the old limit changes what those statements show. Our note on whether to close a facility before applying for the next one covers the order of operations, and how a broker runs the line of credit against bank overdraft comparison covers the pricing and service trade once the structures match.
What actually separates an overdraft from a line of credit?
The separation comes down to where the facility lives and how money physically leaves it, and everything else on this page follows from those two things. An overdraft is a limit attached to a transaction account. You do not draw it, you simply spend past zero, and the facility is invisible until the balance crosses. A line of credit is a facility that exists beside your accounts, and you draw it by moving money out of it, which means a deliberate act with a date and an amount. That is the whole mechanical difference, and it is why one suits movement you do not control and the other suits movement you do.
The consequence people miss is what a cleared balance means in each. On an overdraft, a balance back above zero has repaid the facility completely, and if it stays there the facility costs you nothing but its fees. On a standalone facility, money arriving in your trading account does nothing at all to the drawn balance until you transfer it across. Two businesses with identical cashflow can therefore carry very different average drawn balances, purely because one repays itself and the other needs an instruction.
| Structural feature | Business overdraft | Business line of credit |
|---|---|---|
| Where the facility lives | Inside the transaction account. It is a limit on an account you already operate, not a separate account | Beside it, as a standalone facility with its own balance, and often its own statement |
| How you draw it | You do not. Payments simply overdraw the account, so the facility is used passively whenever the balance would otherwise go negative | By drawdown from the facility: a transfer or a redraw request. Every use is a deliberate act with a date and an amount |
| Repayment character | Evergreen and at-call. Deposits landing in the account reduce the drawn balance automatically, and nothing is scheduled | Evergreen on bank and many non-bank facilities, but may amortise per draw on some non-bank products, where each drawdown is reduced on a schedule. Test it before signing rather than assuming |
| Review basis | Normally reviewed with the account relationship, on conduct: how the account has actually run over the period | Normally reviewed as a facility, against its own limit, terms and any expiry date, rather than against account behaviour |
| What each channel calls it | The bank word, because the bank holds the transaction account the limit attaches to | The non-bank word, because a lender that does not hold your account can only offer you something standalone |
The review basis, in more detail than the row allows
Review is the limb borrowers understand least and the one that decides the most, so it is worth more than a table cell. Neither facility is permanent. Both can be reduced, and the question is what triggers the conversation and what you are told. An overdraft attached to your trading account is reviewed against that account: the reviewer is looking at whether the limit still behaves like a buffer or has quietly become a floor you never come off. A standalone facility is reviewed against itself, which usually means a limit review or an expiry, and which can arrive on a calendar date rather than in response to anything you did. Our piece on the sixty days before a facility review covers how to prepare for the first kind.
Where your bank subscribes to the industry code, some of this is written down rather than left to practice. The 2025 Banking Code of Practice requires a subscribing bank's terms and conditions to tell you, for a loan, "whether the Loan is repayable on demand", which is the single most useful sentence to go looking for in your own documents. The Code also commits a subscribing bank to at least 30 days prior notice of a change to terms and conditions it believes is unfavourable to you, apart from changes to interest rates and repayments. Those commitments only reach you if your business meets the Code's Small Business test, and that test has three limbs which all have to be satisfied, so it is worth checking rather than assuming. If a call-in has already happened rather than being a risk you are pricing, our guide to what to do when the bank recalls an overdraft or facility covers what the demand actually requires and the timeline you are working inside. And where the complaint is about how an existing facility was handled, rather than about a lender declining to offer one, the Australian Financial Complaints Authority accepts small business complaints, and lodging one is free.
The rules sitting behind this section, in five items
- On demandis a disclosure a subscribing bank's terms and conditions must make, for a loan, one way or the other. The qualifier: the Code requires the disclosure, not a particular answer, so finding the answer in your own documents is the actual task. 2025 Banking Code of Practice, paragraph 15(e), read August 2026.
- 30 daysis the minimum prior notice a subscribing bank commits to giving before a change to terms and conditions it believes is unfavourable to you. The qualifier: changes to interest rates and to repayments sit outside this commitment, and a shorter period can apply in defined circumstances. 2025 Banking Code of Practice, paragraph 36, read August 2026.
- Three limbsmake up the Code's Small Business test, and all three must be satisfied: annual turnover of less than $10 million in the previous financial year, fewer than 100 full time equivalent employees, and less than $5 million total debt to all credit providers. The qualifier: the test is applied to your business group where you are part of one, and is applied when the service is obtained. 2025 Banking Code of Practice, Small Business test, read August 2026.
- No noticemay be required at all when a bank calls in an overdraft or on-demand facility, in the Code's own words: "we may not be required to give you any notice when we require repayment". The qualifier: if the failure to repay on demand also counts as a default under another loan with the same bank, the Code's small business notice commitments apply to enforcing that other loan. 2025 Banking Code of Practice, paragraph 85, read August 2026.
- Proportionatelyis how repayments of principal must be applied where one facility has funded both income producing and private use: they reduce both portions in proportion, and cannot be directed at the private part first. The qualifier: this is a tax ruling on deductibility, not a lending rule, and your accountant applies it to your facts. ATO Taxation Ruling TR 2000/2, read August 2026.
General information only and not financial advice; not legal or tax advice either. These are code commitments and a tax ruling, not statements about your facility; your own contract, your bank's code status and your accountant's advice govern.
That last item is the reason account attachment is a consequence rather than a feature, and it is the part of this comparison that no product page covers. An overdraft sits inside the account your business actually transacts through, and for a great many owners that same account also carries drawings, a personal payment or two and the occasional non-business purchase. That makes it a mixed purpose facility for tax purposes, and the Australian Taxation Office ruling on interest deductibility for line of credit and redraw facilities sets out apportionment principles that apply just as squarely to a mixed purpose transaction account: interest is apportioned by reference to how the borrowed funds were applied, on the outstanding principal used for income producing purposes, and repayments of principal reduce the business and private portions proportionately rather than clearing the private part first. A standalone facility drawn only for named business purposes does not create that problem in the first place. If your bookkeeping is already untidy, the tidier structure is worth something real, and it is not something you will see on a comparison table.
One more consequence of where the facility lives is what it does to your next loan application. When you later apply for a home loan or an investment loan, lenders commonly assess a revolving facility at its limit rather than at the drawn balance, because the limit is what you could owe tomorrow, and the facility's conduct is sitting in the statements they read either way. So an oversized limit you keep "just in case" can quietly cost you borrowing power somewhere else. Our note on running a business facility alongside a home loan application covers that collision.
Why do some lines of credit amortise while an overdraft never does?
Because "line of credit" is a marketing category, not a defined structure, and an overdraft is a defined structure. An overdraft cannot amortise: there is nothing to amortise, since the drawn balance is just the account balance below zero and it is repaid the moment a deposit lands. A facility sold as a line of credit can be built any way the lender wants, and some facilities sold as lines of credit are built as a revolving limit over the top of draws that each carry their own repayment schedule. That is a rolling term loan with a reusable limit, and it is a genuinely different product from the thing the name suggests.
It is not hidden, exactly. It is just never the headline. A comparison guide to Australian business lines of credit, read for this guide in August 2026, puts the market position plainly: some businesses may qualify for an ongoing facility with no specified term, but with non-bank lenders there is often a maximum term within which the credit line must be repaid in full, and that maximum is commonly two or three years. A maximum term is not the same thing as a repayment schedule, but the two travel together, because a facility that has to be at zero by a date needs a mechanism to get there.
The difference shows up in one place, and it is not the interest rate. It is what happens in a quiet month. On an evergreen facility, a month where you draw nothing and repay nothing costs you the interest on the balance and the fees, and nothing else happens. On an amortising structure, that same quiet month still takes a scheduled payment out of your account, because the schedule does not care whether the month was quiet. For a business with seasonal or irregular income, that is the difference between a facility that flexes with you and one that adds a fixed outgoing to the months you can least afford it.
Both structures are live in the Australian market right now, from named lenders. NAB's current overdraft page and Westpac's current overdraft page each describe the evergreen shape: no set repayment schedule within the approved limit, with deposits into the linked account doing the repaying. On the other side, Prospa's current Business Line of Credit is a reusable facility built on a renewable 24 month term, with automatic weekly repayments that include a portion of principal while funds are drawn, and continuation reassessed at the end of each term. That is one provider's structure rather than a rule for every line of credit, but it is exactly why the label alone cannot tell you how cash will leave your account.
So here is the question to ask before you sign, and it is one question rather than a checklist:
"If I draw $50,000 today and my account does nothing at all for the next six months, what leaves my account, and when?" An evergreen at-call facility answers with interest and fees only. An amortising structure answers with a repayment figure and a frequency. Ask it in exactly that form, because it cannot be answered with the word "flexible". If the answer is a repayment figure, the follow-up is whether the facility also has a hard expiry, and what happens to any balance outstanding on that date. Illustrative only; no product, cost, approval or outcome is implied.
Two things are worth saying about pricing without putting a price on this page. First, both structures are normally priced on the balance you have actually drawn rather than on the limit you hold, so an unused facility is not usually an expensive thing to have sitting there, and the real cost of holding one is in its fees rather than its rate. Second, the total cost of a cashflow facility is a fee question at least as much as a rate question, and it is not a comparison you can do from headline percentages. The cost arithmetic, the fee types and the current market picture live in the rates and fees section of our overdraft hub guide, which is where that comparison belongs. If you have already decided a standalone revolving facility is the right shape, the business line of credit and overdraft page is where to start a conversation, and how a limit actually gets set is worth reading first. Once the shape is settled, the evidence pack lenders expect with a line of credit application is the practical next step.
Where does a business credit card fit against both?
Beside them rather than against them, and the reason is a mechanic rather than a price. A card's headline advantage is its interest free period, and the regulator's own consumer guidance describes what that actually is: interest free days are "the number of days you won't get charged interest on purchases", and "these only apply if you pay the full balance by the due date" (ASIC MoneySmart). Both halves of that sentence are load bearing. It is a purchases mechanic, and it is conditional on clearing the statement in full.
That is precisely why a card fails as an overdraft substitute. An overdraft covers a shortfall in your bank account. A card cannot do that, because getting money out of a card and into your bank account is not a purchase. It is cash taken out, which the same guidance lists as attracting its own cash advance fee, and which is a different transaction type from the purchases the interest free window applies to. The same goes for bill payment services and anything else that turns card credit into cash or a cash equivalent. So the moment you need the card to behave like a cashflow facility, the one feature that made it attractive stops applying, and you are paying card pricing without the interest free period. A card is excellent at deferring payment for things you buy on it, and structurally incapable of covering a wage run.
Surcharging is the other thing that changes the comparison, and 2026 is a year where it moves. Today, when your business pays a supplier by card, that supplier may pass on a surcharge, which adds a cost to card spend that drawing on a facility does not carry, and the current rules limit any surcharge to what card acceptance actually costs the business charging it. From 1 October 2026 that changes for the main networks: the Australian Competition and Consumer Commission states that the Visa, Mastercard and eftpos networks have each decided to introduce no surcharge rules from that date for businesses accepting their prepaid, debit and credit cards, and the Reserve Bank describes the reform as removing surcharging on debit, prepaid and credit cards on those designated networks from the same date. Note the boundary, in the regulator's own terms: the ACCC states that the current ban does not apply to cash, BPAY, PayPal, Diners Club, American Express or taxi fares, whatever the payment type, so a card program running on a network outside the reform is a different calculation again.
Two spend patterns where the card wins outright, and they are narrower than card marketing suggests:
- Recurring supplier and subscription spend that you clear in full every cycle. Here the interest free window is doing exactly what it was designed to do, the balance never revolves, and the card also gives you a single clean feed into your accounting file instead of a scatter of direct debits.
- Distributed staff spend that needs per person limits and per transaction attribution. Fuel, travel, materials and site purchases across several people are an administrative problem before they are a funding problem, and cards solve the administration in a way one shared overdraft on one account cannot.
Everything else, and particularly anything that looks like covering a gap between money going out and money coming in, belongs on a facility rather than on a card. If you work in the trades and want this comparison run for that specific setup, we have a tradie version of the three way comparison. Which of the three is actually cheapest for a given usage pattern is a cost question, and it is answered in the hub rather than here.
When is a term loan or invoice finance the better tool?
When the shape of the need is not revolving. The government's own guide to choosing your funding sets these out side by side as separate categories, and that is the right frame: they are not weaker versions of a revolving limit, they are answers to a different question. This section is deliberately short, because both products have their own homes and the point here is only to tell you when to leave this comparison.
One defined outlay points to a term loan
If you can name the amount, name what it is for, and name roughly how long the thing will earn its keep, you are describing an amortising advance rather than a revolving limit. A term loan matches the repayment to the benefit, prices accordingly because the lender can see the whole shape of the exposure, and removes the discipline problem that a revolving facility creates, which is that a limit you never have to clear is a limit you tend not to clear. The mistake in the other direction is just as common: funding a one off outlay from a revolving facility and then never getting the balance back down, so that the facility is permanently occupied and unavailable for the fluctuation it was there to absorb. Full treatment of amortising business lending, and a related comparison in our piece on working capital loans against an overdraft for growth.
Cash locked in the ledger points to invoice finance
If your business is receivables heavy, the money is not missing, it is issued and unpaid. Funding that gap with a revolving limit works, but it means a lender is sizing a facility against your business generally when there is a much more direct security available, which is the invoices themselves. Facilities secured by the ledger tend to scale with sales rather than sitting at a limit somebody set last year, which matters most for the businesses that grow fastest and feel the gap hardest. What changes the answer is debtor concentration and how well your ledger behaves. Full treatment of funding secured by your ledger.
What do lenders check before approving an overdraft or line of credit?
Four things, at every lender: what the business earns, what it already owes, how its accounts behave, and whether the limit requested makes sense against all three. The pack that proves them is smaller than most owners expect, and the account conduct part of it is the same statements this page keeps coming back to.
Current lender pages show the pattern rather than a single standard. Westpac's overdraft page asks for the latest annual financial statements or business tax return plus twelve months of business activity statements, and states that bank accounts and loan balances must be within their approved limits. Its unsecured overdraft eligibility adds that ATO payments, loan repayments and employee entitlements including super should be up to date, and that the business should not foresee a revenue decline that would affect paying its liabilities. NAB's QuickBiz overdraft process can ask for bank statements, transaction lists, profit and loss reports and a balance sheet, plus trust deeds and ATO Online Services reports where they apply. ANZ's GoBiz process can instead analyse reconciled accounting data straight from your software, covering profit and loss, balance sheet and historical transactions. All read August 2026, and all of it is the same question asked three ways: does the way money already moves through this business support the limit being asked for?
Two practical consequences. First, tidy the file before the application, not during it: an ATO payment plan, an unexplained dishonour or a limit breach in the last quarter of statements costs more at assessment than it ever cost in fees. Second, the pack is lighter for an overdraft attached to an account the lender can already see than for a standalone facility at a new lender, which is one of the quiet reasons overdrafts usually come from your existing bank.
What happens at annual review, and can the limit change?
The lender re-decides the facility. An overdraft or line of credit does not run to a maturity date the way a term loan does; it continues because the lender agrees, at each review, that it should. That makes review a borrowing event in its own right, even when there is no application form in front of you.
Both continuation models are visible on current product pages. NAB describes its Business Overdraft as a revolving line of credit subject to annual review, with no set repayment schedule inside the approved limit. Prospa's line of credit runs the other model: a set two year term, at the end of which you apply to renew or the facility closes. Either way, the review looks at the same file the approval did, one year on: conduct on the account, total exposure, and whether the financials still support the limit. The limit can be renewed, increased, reduced or not continued, and the 2025 Banking Code's notice commitments set the floor for how unfavourable changes reach a small business at a subscribing bank.
The preparation is not complicated, but it has a deadline you do not set. Our sixty day preparation plan for the annual facility review covers what to have ready and when to ask for an increase, because review is the one moment each year when the lender is already looking at your file with fresh information in front of it.
What does your bank statement say you should choose?
Plot your closing balance and read the shape of the line: that is the whole method, and it is the only part of this decision you can do entirely on your own. Pull the last two quarters of your main trading account, plot the closing balance day by day, and look at the shape of the line rather than at any individual number. It takes less than half an hour and it is more useful than any comparison table, including the ones on this page. There are three patterns, and each one points somewhere different. The two extremes are set out in the pair below, and the middle one is described straight after them.
Pattern one, oscillation around zero
- The line crosses zero repeatedly and recovers each time without intervention
- The troughs are shallow relative to your monthly turnover
- The timing is driven by when money lands, not by what you decided
- There is no month where the balance simply fails to come back
- This is the overdraft shape, and the limit you need is set by the depth of the troughs
Pattern three, a balance that ratchets down
- Each trough is deeper than the one before it
- Each recovery peaks lower than the last recovery
- The line has a downward slope across the whole period, not a cycle
- Nothing in the pattern is seasonal, and nothing explains it as timing
- Neither revolving facility fixes this, and adding one usually makes it worse
Pattern two, lumpy and irregular draws, sits between those two and is the easiest to recognise: long flat stretches where the balance barely moves, punctuated by a handful of large, deliberate movements you could have named in advance. Stock buys, a quarterly tax bill, a wage run for a big job, a piece of equipment. If your line looks like a flat road with a few cliffs in it, you want the standalone facility, because each of those cliffs is a decision you make and a facility you draw on purpose is a better fit for a decision than a limit that is used by default. Our note on using a line of credit safely covers keeping it that way.
Pattern three deserves the honest answer rather than a product recommendation, because it is the one where the finance industry is least useful. A balance that ratchets down and never recovers is not a timing problem, and a revolving facility is a timing instrument. What a facility will do is give you the length of the limit in extra runway and then leave you in the same position with a debt attached, and because the drawn balance never comes back down, the facility itself becomes evidence at the next review. If your line has this shape, the work is in the trading position, in pricing, in cost, in terms with your own debtors and creditors, and finance is at most a way of buying time to do that work rather than a substitute for it. Say that out loud to whoever is advising you and see whether they agree, because a broker who cannot tell you that borrowing is the wrong answer is not much use to you when it is. Where the ratchet is driven by accumulated repayments across several facilities rather than by trading itself, restructuring what you already owe is the finance conversation that does fit, and the trading side of the work sits with your accountant.
From the broker's desk
Four observations from working cashflow files, offered as observations rather than as rules, and deliberately without figures:
- Almost nobody arrives having plotted the balance. The request is usually a round number that sounds about right. Half an hour with two quarters of statements changes the request on most files, and it usually changes the shape of it, not only the size.
- The most expensive mistake is a facility used against its shape. A one off outlay funded from a revolving limit that then never clears is the most common version, and it costs more in lost availability than it ever cost in interest.
- The review is decided long before the review. How the facility has behaved over the period is the assessment, so a limit that has come back to zero at any point during the year reads completely differently from one that has not.
- Both facilities can be reduced, and borrowers plan for neither. A revolving limit is not a reserve you own, and the businesses that come through a reduction well are the ones that were never operating with the limit fully committed.
General observations from broking practice, not an offer, an assessment or a prediction. Every facility is assessed on its own facts and on the individual lender's policy at the time.
One last thing worth knowing, because it is the other side of the same statements. The lender reads this document too, and it does not read it the way you do. What you see as a healthy cycle, a credit assessor may read as a facility that is permanently drawn, and what you see as one bad month, they may read as the start of pattern three. We wrote up what twelve months of bank statements tell an overdraft lender from that side of the desk, and reading the two together is the best preparation available for either a new facility or a review.
A business overdraft and a business line of credit are both revolving facilities priced on what you draw, which is why comparing them on features never resolves anything. What separates them is where the facility lives and how money leaves it: an overdraft is a limit inside your transaction account that is drawn passively and repays itself as deposits land, and a line of credit is a standalone facility drawn on purpose and repaid on instruction. Match that to what your balance actually does. Constant oscillation around zero takes the overdraft, lumpy and deliberate draws take the line of credit, one defined outlay takes a term loan, and cash locked in the ledger takes invoice finance. Check the repayment character before you sign either, because some facilities sold as lines of credit reduce each draw on a schedule and are term loans wearing a revolving name. Plot your closing balance for two quarters before you talk to anyone, because the shape of that line answers the question faster than any comparison table will.
Key takeaway: if your balance ratchets down and never recovers, neither of these products is the answer, and a facility bought at that point mostly buys time you then have to pay for.Frequently Asked Questions
There is no single product called an overdraft line of credit; the phrase runs two product names together because the two are sold as near substitutes. What people mean is a revolving credit limit for a business: draw, repay and draw again without reapplying, with interest charged on what is drawn. The split: if the limit is attached to your transaction account and incoming deposits repay it, that is an overdraft; if it sits in a facility of its own that you draw from, that is a line of credit.
Two questions about your own balance decide it, and neither is about the products. Does your balance cross zero repeatedly and climb back on its own? Then the overdraft fits, because the facility lives inside the account where that movement happens and repays itself. Are your funding needs a small number of large, deliberate draws you could name in advance? Then the line of credit fits. If the answer to both is no, neither is right: a single defined outlay suits a term loan, and cash locked in unpaid invoices suits invoice finance.
A line of credit is a limit you can use repeatedly; a business loan is one advance you repay down. With a revolving limit you draw what you need, pay interest on the drawn balance, and reuse the room as you repay. With a term loan the full amount is advanced once, interest runs on the whole balance from day one, and a set schedule reduces it to zero. A repeated or unpredictable need fits the revolving limit; a single defined outlay fits the amortising advance. More on how a term facility is structured.
Yes, and for some businesses running both is the correct structure rather than duplication. The pairing that works: a modest overdraft on the trading account, sized to the depth of your normal troughs, plus a separate facility sized to the planned draws too large to run through the account. Two cautions. A lender assesses total exposure across both, not each facility on its own. And conduct on both is read together at annual review, so an overdraft that never returns to zero will colour how the standalone facility is viewed.
Operationally yes, but you lose two things. You have to notice the shortfall and transfer funds across before the payment goes out, where an overdraft absorbs it automatically, so you are adding a manual step exactly where a missed step costs a dishonour. And deposits landing in your trading account do nothing to the drawn balance until you move money back. Before relying on it weekly, run the three part test, and if you are replacing one facility with the other, read whether to close the old facility before applying first.
What sources support this guide?
Every source below was read in its current form for this guide rather than taken from a summary, and two things the brief for this page carried did not survive that check. A widely quoted rate band for non-bank facilities turned out to be one lender's advertised range rather than a market position, so no rate figure appears anywhere on this page and cost is routed to the guide that owns it. And a well known non-bank facility that was expected to be the worked example of an amortising "line of credit" reads today as a revolving facility with a periodic review rather than a fixed term, so it is not used as one. The finite term point stands on published market commentary instead, and is written as something to test rather than as an accusation.
| Source | What it supports | As at |
|---|---|---|
| 2025 Banking Code of Practice, Australian Banking Association | That a subscribing bank's terms and conditions must state, for a loan, whether it is repayable on demand; the commitment to at least 30 days prior notice of an unfavourable change to terms and conditions apart from interest rate and repayment changes; the three limb Small Business test that decides whether those commitments reach your business; and that no notice may be required at all when an overdraft or on-demand facility is called in | Read Aug 2026 |
| ATO Taxation Ruling TR 2000/2, line of credit facilities and mixed purpose accounts | That interest on a mixed purpose facility is apportioned by reference to how the borrowed funds were applied, and that repayments of principal reduce the income producing and private portions proportionately rather than being directed at one of them | Read Aug 2026 |
| ASIC MoneySmart, choosing a credit card | That interest free days are days you are not charged interest on purchases, that they apply only if the full balance is paid by the due date, and that cash taken out attracts its own cash advance fee | Read Aug 2026 |
| Australian Competition and Consumer Commission, card surcharges guidance | The current surcharging rules and their scope, including that they do not extend to cash, BPAY, PayPal, American Express or Diners Club, and that the Visa, Mastercard and eftpos networks have each decided to introduce no surcharge rules from 1 October 2026 for their prepaid, debit and credit cards | Read Aug 2026 |
| Reserve Bank of Australia, Review of Merchant Card Payment Costs and Surcharging, conclusions | The decision to remove surcharging on debit, prepaid and credit cards on the designated eftpos, Mastercard and Visa networks from 1 October 2026, with lower domestic interchange caps from the same date | Read Aug 2026 |
| business.gov.au, choose your funding | The government framing that sets a revolving limit, a loan and invoice-based funding out side by side as separate funding categories rather than as stronger and weaker versions of one another, used as the neutral baseline for the comparison frame in the term loan and invoice finance section | Read Aug 2026 |
| Published Australian business line of credit comparison guide | The market position that some facilities are ongoing with no specified term, but that non-bank lenders often set a maximum term within which the credit line must be repaid in full, commonly two or three years. Cited by description because the publisher is a commercial comparison site rather than a primary source | Read Aug 2026 |
| NAB Business Overdraft product page | Current product wording that the NAB Business Overdraft has no set repayment schedule within the approved limit and is a revolving line of credit subject to annual review, linked to an eligible NAB transaction account; the QuickBiz page's list of financial information the process can request | Read Aug 2026 |
| Westpac Business Overdraft product page | Current application wording asking for the latest annual financial statements or business tax return plus twelve months of business activity statements, the requirement that bank accounts and loan balances be within approved limits, and the unsecured overdraft eligibility conditions on ATO payments, employee entitlements and foreseeable revenue | Read Aug 2026 |
| ANZ GoBiz online business lending page | Current application wording that the GoBiz process can analyse reconciled accounting data from connected software, including profit and loss, balance sheet and historical transactions | Read Aug 2026 |
| Prospa Business Line of Credit product pages | Current product wording that the facility is reusable on a renewable 24 month term with automatic weekly repayments that include a principal portion while drawn, and that at the end of each term the borrower applies to renew or the facility closes | Read Aug 2026 |
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