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Revolving credit facility vs overdraft: what is the difference?
Revolving credit facility vs business overdraft: who offers them, repayment on demand, cost and security compared, with an example and when to use each.
In this guide
Both an overdraft and a revolving credit facility (RCF) let a business borrow up to a limit, repay and borrow again, paying interest only on what it uses. The differences are in who provides them, how firmly the money is committed and how they are repaid. This guide sets them side by side. We are a broker: we compare revolving facilities from lenders on our panel.
How each works
An overdraft is a borrowing limit attached to your business current account. The balance goes below zero as you pay bills and recovers as money comes in. Most business overdrafts are agreed for a year and are repayable on demand, so the bank can reduce or withdraw them.
A revolving credit facility is a separate account with a set limit. You request a drawdown, the money is paid into your current account, and you repay on the terms of the facility, often within a set period for each drawing. Many RCFs are offered by specialist and online lenders, so you can keep your bank account where it is.
Side by side
| Business overdraft | Revolving credit facility | |
|---|---|---|
| Provider | Your current account bank | Banks and specialist lenders |
| How you borrow | Automatically as the account goes overdrawn | You request each drawdown |
| Commitment | Usually repayable on demand | Agreed for the facility term, subject to its conditions |
| Interest | On the overdrawn balance | On the amount drawn |
| Fees | Arrangement or renewal fee | Arrangement fee, sometimes a drawdown or non-utilisation fee |
| Repayment | From money coming into the account | Set by the facility: within a period per drawing, or by the end of the term |
| Security | Often a guarantee or debenture for larger limits | Often a personal guarantee; larger limits can be secured on property |
A worked example
A wholesaler needs up to £100,000 for four months each autumn to buy stock before Christmas. With either facility, interest is paid only on what is drawn. At an illustrative 18% a year (inside the range revolving lenders on our panel publish; see the rate index), borrowing £100,000 for four months costs about £6,000 of interest, plus fees, and nothing for the rest of the year. The practical difference is certainty: an RCF agreed for 12 months is less likely to be withdrawn in the middle of the season than an overdraft repayable on demand.
When an overdraft suits
- Small, short dips in the current account that clear within weeks.
- Your bank already offers one at a sensible limit and price.
- You value the automatic nature of it, with no drawdown requests.
When a revolving credit facility suits
- Your bank will not offer an overdraft, or will not increase it.
- You want a larger or more certain limit for seasonal or contract cash flow.
- You want to keep your banking separate from your borrowing.
- Your overdraft has become "hardcore", never coming back above zero.
Advantages and disadvantages
| Advantages | Disadvantages | |
|---|---|---|
| Overdraft | Automatic; simple; interest only when overdrawn | Repayable on demand; limits often small; tied to one bank |
| Revolving credit facility | Committed limit; can be larger; any bank account | Each drawing requested; rates can be higher; fees on some facilities |
Other options
If the gap is caused by customers paying slowly, invoice finance can grow with your sales. Our overdraft vs business loan and revolving credit facility vs term loan guides compare the other combinations, and business overdraft alternatives lists the rest.
How we can help
This guide is general information, not financial advice. Lenders set their own criteria, rates and terms, and all finance is subject to status.
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FAQs
Common questions
Is a revolving credit facility the same as an overdraft?
They are similar: both let you borrow, repay and borrow again within a limit, paying interest on what you use. An overdraft sits on your bank current account and is usually repayable on demand; an RCF is a separate facility, often from a specialist lender, agreed for a term.
Can I have an overdraft and a revolving credit facility?
Yes. Some businesses keep a small overdraft for day-to-day dips and use an RCF for larger seasonal needs. Lenders will look at your total borrowing when they assess either.
Will a revolving credit facility affect my bank overdraft?
It can if your bank holds a debenture or has conditions on other borrowing, so check your existing facility letter. Many unsecured RCFs sit alongside a bank overdraft without a problem.
Keep reading
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