What is a Business Overdraft?
A bank overdraft is an arrangement with your business bank to borrow up to an agreed limit by drawing your account into a negative balance. It is repayable on demand - meaning the bank can reduce or cancel it at any time. Interest is charged daily on the drawn balance, with arrangement fees and annual renewal fees typical. Overdraft limits are set by the bank based on your trading history and are typically reviewed annually.
What is a Revolving Credit Facility?
A revolving credit facility (RCF) is an alternative lending product that works similarly to an overdraft: you have an agreed limit, you draw what you need, and you repay when cash comes in. The key differences: an RCF has a fixed term (typically 12-36 months), a contractually agreed limit that cannot be reduced during the term, and is provided by a specialist alternative lender rather than your business bank. Many RCFs charge interest only on the drawn balance, with a small undrawn commitment fee.
Key Comparison
Repayable on demand: Overdraft - yes, at any time. RCF - no, the limit is fixed for the agreed term. Availability: Overdraft - restricted to your bank, which may decline. RCF - available from 130+ specialist lenders independently of your bank. Rates: Overdrafts have been increasingly expensive from high-street banks. RCF rates from specialist lenders are often competitive or lower. Limit: Overdrafts are typically set conservatively by relationship managers. RCF limits are sized to actual working capital requirements. Credit impact: Both appear on your credit file as debt.
When an Overdraft is Better
An overdraft is better when: you are an existing bank customer with a strong relationship and competitive terms; the amount you need is small and infrequently drawn; you want the simplicity of a single integrated banking product; or your bank is offering a rate that genuinely beats the RCF market.
When a Revolving Credit Facility is Better
An RCF is better when: your bank has declined, reduced, or threatened to reduce your overdraft; you want a guaranteed facility for a defined period; you need a higher limit than your bank is prepared to offer; you want access to working capital independently of your banking relationship; or you have been declined by your bank for any reason.