Short answer: A business loan gives you a lump sum with fixed repayments, an overdraft sits on your existing bank account and only charges interest on what you draw, and a line of credit is a separate revolving facility that works similarly to an overdraft but is often available through a broader range of lenders. Which one suits depends on whether you need funding for a one-off purchase or ongoing working capital flexibility.
Business owners often default to whichever facility their bank offers first, without comparing it against the alternatives. The three options above solve different problems, and picking the wrong one can mean paying for flexibility you don’t use, or being locked into fixed repayments when what you actually needed was a buffer. Here’s how they typically differ in practice.
What’s the difference between a business loan, overdraft and line of credit?
A business loan is a term facility: you borrow a fixed amount, receive it as a lump sum, and repay it in scheduled instalments over an agreed term, usually with a fixed or variable interest rate applied to the full outstanding balance.
A business overdraft is attached to your everyday transaction account. It gives you an approved limit you can draw down and repay as needed, and you’re only charged interest on the drawn portion, not the full limit. Overdrafts are typically reviewed annually and can be reduced or recalled by the lender, which is worth factoring into any planning.
A line of credit works on a similar revolving principle to an overdraft, but it’s a standalone facility rather than being tied to a specific transaction account. It can sometimes offer higher limits or different security arrangements than a bank overdraft, and is available through a wider range of lenders, including non-bank commercial lenders.
When does a term loan make more sense than an overdraft?
Term loans are generally better suited to funding that has a clear, one-off purpose and a defined repayment horizon, such as buying equipment, funding a fit-out, or financing a business acquisition. Because the repayment schedule is fixed, it’s easier to budget around, and the interest rate is often lower than a revolving facility of similar risk, since the lender has more certainty over the loan’s structure.
An overdraft or line of credit, by contrast, tends to suit situations where the funding need fluctuates: covering payroll during a slow month, bridging the gap between invoicing and payment, or having a buffer available for unplanned costs. Using a term loan for this kind of need often means borrowing more than necessary and paying interest on funds that sit idle.
How does a line of credit work day to day?
Once approved, a line of credit gives you access up to an agreed limit that you can draw on, repay, and redraw as often as needed, similar to a credit card but usually at a lower rate and with a higher limit. Interest is charged only on the outstanding balance, and many facilities allow interest-only repayments with the option to reduce the principal when cash flow allows.
Security requirements vary. Some lenders offer unsecured lines of credit up to a certain limit, typically backed by a personal guarantee, while larger facilities are often secured against property or business assets. Non-bank lenders may have more flexible criteria than the major banks, though this can come with a higher rate.
Cost and flexibility compared
The table below is a general comparison. Actual pricing, limits and features vary significantly between lenders.
| Feature | Business term loan | Overdraft | Line of credit |
|---|---|---|---|
| How funds are provided | Lump sum upfront | Draw as needed, up to limit | Draw as needed, up to limit |
| Interest charged on | Full outstanding balance | Drawn amount only | Drawn amount only |
| Best suited to | One-off purchases, acquisitions | Everyday cash flow smoothing | Ongoing working capital flexibility |
| Typical review cycle | Fixed term, no review | Annual review | Annual or periodic review |
| Repayment structure | Scheduled principal and interest | Flexible, interest-only common | Flexible, interest-only common |
Figures are indicative only and will vary by lender, asset and applicant.
Which option suits different business situations?
A retailer preparing for a seasonal stock build-up might lean towards an overdraft or line of credit to manage the temporary spike in working capital needs, then let the balance run down once trading normalises. A trades business buying a new vehicle or piece of equipment usually finds a term loan more appropriate, since the asset has a defined cost and useful life that maps neatly to a fixed repayment schedule.
Many established businesses run a combination of both: a term loan for growth assets, alongside an overdraft or line of credit as a working capital buffer. This structure often gives more resilience than relying on a single facility, since it separates long-term debt from short-term cash flow management. Our guide to business loan interest rates in Australia covers how pricing is typically set across these facility types, and if you’re managing invoice timing gaps specifically, our article on debtor finance looks at another alternative worth comparing. ASIC’s Moneysmart also has general guidance on comparing business finance costs at moneysmart.gov.au.
If you’re not sure which structure fits your situation, it’s usually worth talking it through before applying, since the wrong facility can be expensive to unwind later. Contact TYG Finance for a comparison based on your business’s actual cash flow pattern.
What do lenders look at when assessing each facility?
Eligibility criteria differ across the three facility types, and understanding this can save time when deciding where to apply. Term loans are typically assessed against the purpose of the loan, the value and useful life of any asset being financed, and the business’s capacity to service fixed repayments from historical cash flow. Overdrafts and lines of credit are usually assessed more on the pattern of cash flow through the business’s transaction accounts, since the lender needs confidence that drawn balances will be repaid within a reasonable cycle rather than sitting permanently at the limit.
A business that consistently sits at its overdraft limit month after month, rather than fluctuating up and down, is often a signal to lenders (and to the business owner) that the facility is being used to plug a structural gap rather than smooth temporary timing differences. In that situation, restructuring part of the debt into a term loan, or reviewing pricing and margins, is often a more sustainable fix than simply requesting a higher limit.
Frequently asked questions
Is an overdraft cheaper than a business loan?
Not necessarily. Overdrafts often carry a higher interest rate than a term loan, but because you only pay interest on the amount drawn, the total cost can be lower if you don’t use the full limit for extended periods. It depends heavily on how the facility is actually used.
Can I have a business loan and a line of credit at the same time?
Yes, many businesses run both concurrently, using a term loan for asset purchases and a line of credit or overdraft for working capital. Lenders will assess your total borrowing capacity across all facilities when approving new finance.
Do overdrafts get reviewed or cancelled?
Most business overdrafts are subject to periodic review, typically annually, and the lender can reduce or recall the facility depending on your financial position at review time. This is worth factoring in if you rely on an overdraft as a permanent buffer.
What security is needed for a line of credit?
This varies by lender and facility size. Smaller unsecured lines of credit are often available against a personal guarantee, while larger facilities are typically secured against property or business assets.
Which option is better for a new business with limited trading history?
Newer businesses may find overdrafts and lines of credit harder to secure without an established banking relationship, and often turn to unsecured business loans or low doc facilities in the early stages. Lending criteria and available options can vary considerably by lender.