The right business finance solution can help your small or medium sized enterprise (SME) better manage cash flow, cover gaps in working capital or weather seasonal fluctuations.
However, whether a line of credit vs overdraft is right for you will depend on a number of factors.
At ScotPac, we provide flexible business working capital solutions for SMEs across Australia. To explore how we can help you, contact our team today. In the meantime, we will break down when to choose a business line of credit over an overdraft alternative.
What is a Business Overdraft vs Line of Credit?
How does a Business Overdraft work?
A business overdraft is a financial facility designed to allow you to continue accessing working capital even when your business account balance is zero (or less).
Your overdraft will have an agreed limit and is directly linked to your business transaction account. It allows you to quickly access cash to cover short-term expenditure and operational needs but can incur higher interest rates and fees than other forms of finance, such as a line of credit.
How does a Business Line of Credit work?
A business line of credit allows your company to draw funds up to an approved limit but is not connected directly with your transactional business account.
Rather, it is a revolving loan facility. This means you can repay the drawn funds and redraw it as necessary, in a similar way you might use a credit card.
There are pre-approved limits, secured and unsecured options, and crucially you only pay interest on the funds drawn, not the full agreed line of credit limit. Repayment terms are also generally more flexible than other financial options and standard loans.
What’s the difference Between a Line of Credit and a Business Overdraft?
| Business Overdraft | Line of Credit | |
|---|---|---|
| Structure | Serves as an extension of an existing transaction account | Provides a revolving loan facility |
| Credit Limit | Depends on lender but is generally lower than a line of credit | Generally higher than overdraft alternatives; with ScotPac you can borrow up to $500,000 |
| Interest Rate | Most commonly higher than line of credit | Most commonly lower than overdraft |
| Fees | Fees can apply to setup, account management, and lack of use | Possible monthly or setup fees |
| Repayment Flexibility | Flexible with no fixed schedule | Flexible with ability to redraw funds paid back |
| Funds Access | Linked to your transactional account | Draw funds into any account |
| Approval Turnaround | Within a few days | Funds available within 24 hours of approval |
| Security / Collateral | Unsecured | Secured or unsecured |
What are the Pros and Cons of Line of Credit vs Overdraft?
What are the Pros of a Business Overdraft?
There are a number of advantages to using a business overdraft in the right situation.
- Immediate access to working capital
- Interest is charged on the amount overdrawn only
- There is no fixed schedule of repayments allowing flexibility
- Approvals are fast and easy as it is linked to an existing account
What are the Cons of a Business Overdraft?
Some of the things to be aware of when it comes to an overdraft alternative include:
- Interest rates are normally relatively high
- There may be account-keeping fees and/or establishment fees
- Credit limits can be lower than some alternatives
- Funds can only be accessed through your existing account
- It can be harder to avoid overspending and responsible cash flow management
What are the Pros of a Business Line of Credit?
The advantages of seeking a business line of credit with ScotPac include:
- Higher pre-approved credit limits for access to more working capital
- Generally lower interest rates, especially when secured with collateral
- Flexible access allows control over use of the funding facility
- Revolving loan allows you to draw, repay and redraw as needed
- Approvals, especially with ScotPac’s online process, are quick and easy
What are the Cons of a Business Line of Credit?
Some things to be across when it comes to a line of credit facility include:
- Larger line of credit facilities may require security in the form of an asset
- Inactivity fees can apply if funds are not drawn over a certain period
- The application process, especially for secured lines of credit, can take slightly longer than overdrafts
- Some lenders may charge early repayment fees
When is a Line of Credit Better than an Overdraft?
Ultimately, the right working capital solution will depend on your business objectives, needs, and situations.
An overdraft alternative is good if your SME needs to fill short-term cash flow gaps or has an unexpected, urgent expense to pay.
A line of credit is more suitable for planned cash flow needs, funding growth opportunities and general investment in expansion.
Would you like to find out more about how a Line of Credit can help your business?
If you are still unsure about which is the right choice between a line of credit vs overdraft, we are here to help.
Our ScotPac lending specialists work closely with each and every client to understand their needs and objectives before providing custom advice on which funding solution is right.
Read to get started? Enquire about our flexible business lines of credit today.