Business line of credit vs overdraft: which is right for your cash flow?

Short answer

They solve the same problem (short-term cash-flow gaps), but they're built differently and priced differently. An overdraft is attached to your business transaction account and lets your balance go below zero up to an agreed limit. A line of credit is a separate revolving facility you draw on independently of your everyday account. The practical difference that matters: overdrafts often charge a fee on your wholelimit whether you use it or not, while a line of credit typically charges interest only on what you've drawn, and usually at a lower rate.

Side by side

Rates and fees vary widely by lender, facility size and your trading profile. The only number that matters is the one on your actual offer.

Where each one wins

Choose an overdraft when the gaps are small, frequent and unpredictable, and you value having the buffer sitting right on the account you already transact from. The trade-off is cost: overdrafts commonly carry an establishment fee and a line fee charged on the full approved limit, so you can pay for capacity you never draw.

Choose a business line of credit when your funding needs are ongoing or planned: smoothing seasonal dips, bridging invoice cycles, holding a buffer you only pay for when you use it. Because a line of credit is a separate facility, non-bank lenders can approve one on your cash flow in hours, without the bank relationship an overdraft usually assumes.

For larger or longer needs, neither may be the answer. A term loan or working-capital finance can be cheaper for a defined lump sum, and a business credit card covers small everyday spend with an interest-free float.

The cost trap most people miss

The headline rate isn't the whole cost. An overdraft's line fee on the full limit means a $100,000 overdraft can cost you even in a month you draw nothing. A line of credit's “pay for what you draw” structure is why it usually works out cheaper for a buffer you dip into occasionally, but check for any facility fee on the line too, because some lenders charge one. Compare the all-in cost, not just the advertised rate. Avoir matches you to lenders on a soft check, so comparing doesn't touch your score.

What the banks publish for unsecured overdrafts

Each of the big four publishes an interest rate and a separate fee charged on the whole limit. As at 3 October 2026:

Secured overdrafts are cheaper: CBA publishes from 8.75% p.a. and Westpac from 8.11% p.a. where security is taken.

Non-bank lines of credit mostly do not publish a rate. Prospa and Lumi both charge interest only on the drawn balance, with weekly repayments; Prospa adds a small weekly service fee and Lumi a one-off establishment fee. Ask for the total cost of a realistic draw before you sign.

Worked example: a $50,000 limit, $20,000 drawn for three months

Avoir calculation over 91 days at each bank's published rate and limit fee. Excludes establishment fees. Roughly a fifth of the cost is the fee on the unused limit.

Draw nothing for those three months and the overdraft still costs $187 to $218 in limit fees. A line of credit priced only on the drawn balance would cost nothing in that quarter, which is the whole case for it as a buffer you rarely touch.

Line of credit or an unsecured term loan?

If you know the amount and you will use all of it, a term loan is usually cheaper and simpler: one draw, fixed repayments, a fixed end date. The banks publish unsecured term loans from about 12.7% to 13% p.a., below their unsecured overdraft rates.

A line of credit wins when the amount and timing are uncertain, because you pay only while money is out. Compare our unsecured business loans guide for term loan pricing.

Overdraft or business credit card?

Both give you money you can draw on without applying each time, but they are built for different jobs.

A business credit card is for spending. Most cards give you an interest-free period on purchases if you clear the full statement balance by the due date, so if you pay it off every month you pay no interest at all, just the card's annual fee. Carry a balance past that period and interest is usually charged at a higher rate than an overdraft. Cash withdrawals and transfers to your account are usually treated as cash advances: interest from day one, a cash advance fee on top, and no interest-free period.

An overdraft is for cash flow. It sits on your transaction account, so it covers payments a card can't make easily, like wages, ATO payments, BAS, rent and supplier transfers. Interest is charged daily on what you've drawn, with no interest-free period, and most bank overdrafts also charge a fee on the full limit whether you use it or not (see the bank figures above).

The short version: if you clear it every month and the spend can go on a card, a credit card is usually the cheaper tool. If the gap is wages, tax or transfers, or the balance will sit there for weeks, an overdraft or line of creditis the better fit, and a card's cash advance is usually the most expensive way to fill it.

Plenty of businesses run both: a card for everyday purchases and an overdraft or line of credit as the cash-flow buffer.

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