Overdraft, business credit card or revolving facility: which short-term borrowing fits

Almost every business eventually needs money it does not have for a few weeks. A big order to fund, a customer paying late, a quarter where the VAT bill and the rent land in the same fortnight. A term loan is the wrong shape for that — you do not want to borrow £30,000 for five years to cover a six-week gap, and you certainly do not want to be paying interest on it in year four.

So you end up choosing between three products that look interchangeable and are not: an overdraft, a business credit card, and a revolving credit facility. Most owners pick whichever their bank offered first, then discover the differences at the worst possible moment. Here is how they actually behave.

What each one really is

An overdraft is a permission to go below zero on your business current account, up to an agreed limit. It sits on the account you already use, so it works automatically — you never have to draw anything down. You pay interest on the balance you are actually overdrawn, day by day, plus usually an annual arrangement or renewal fee on the limit whether you use it or not.

A business credit card is a separate account with a limit, a statement date and a payment due date. Its distinguishing feature is the interest-free window: if you clear the statement balance in full by the due date, purchases made during that statement period cost you nothing in interest. Miss it, or take cash out, and the interest rate is typically the highest of the three by a distance.

A revolving credit facility is the grown-up version of an overdraft, usually from a non-bank lender. You have an agreed limit, you draw down what you need into your bank account, you repay when you can, and you redraw. Interest runs on the drawn balance. Most facilities also charge a non-utilisation fee — a smaller percentage on the part of the limit you are not using — which is the price of having it standing by.

The same £20,000 gap, three ways

The figures below are illustrative. They are there to show the shape of the charges, not to quote anyone's rates — pricing varies enormously by lender and by how your business looks on paper.

Say you need £20,000 for 45 days to buy stock for a confirmed order.

On an overdraft with a £30,000 limit priced at 13% EAR, plus a £300 annual renewal fee: 45 days of interest on £20,000 works out at roughly £320, and you have already paid £300 for the year regardless. Cost for this use: about £320 marginal, £620 including the fee you were paying anyway.

On a credit card, if the supplier takes card payment and you can clear the balance in full on the due date, the cost is whatever card surcharge or fee the supplier applies — frequently nothing at all, in which case the borrowing is free. If you cannot clear it and the balance rolls at 24.9% APR, 45 days on £20,000 costs roughly £600, and it compounds monthly from there.

On a revolving credit facility with a £30,000 limit at 15% on drawn funds plus a 1% annual non-utilisation fee: 45 days on £20,000 is about £370, plus roughly £100 a year on the undrawn £10,000.

On those illustrative numbers the credit card wins outright if — and only if — you clear it in full. It is the most expensive product in the world if you do not.

Short-term borrowing is not priced by the rate on the front page. It is priced by whether you actually repay it in the window the product was designed for.

The clause that matters more than the rate

Here is the thing nobody reads until it is a problem. An overdraft is almost always repayable on demand. The bank can reduce or withdraw it, in principle at any time, and in practice at the annual review. Overdrafts are typically granted for a fixed period of no more than a year and then reviewed.

That matters because an overdraft is the easiest facility in the world to end up living in permanently. If your account never comes back above zero, the overdraft has stopped being working capital and become long-term debt sitting on a facility that can be pulled — which is exactly the trap described in the overdraft that quietly became permanent.

A revolving credit facility is usually committed for a defined term — 12 or 24 months — which is a genuinely different risk profile. You are paying the non-utilisation fee partly for that certainty. A credit card limit can also be reduced by the issuer, but you are rarely relying on one for structural funding.

The test is simple: look at your business current account balance on the lowest day of each of the last twelve months. If it was below zero in nine of them, you do not have a cash-flow timing problem that an overdraft solves. You have a working capital shortfall, and the honest fix is a term facility or a change to how you get paid. A cash-flow forecast a lender will believe will show you which of the two you are looking at.

Personal guarantees, and the £25,000 line

Expect a personal guarantee on the overdraft and the revolving facility, and often on the credit card too, particularly for a younger company or one with a thin filing history. That is normal, but it is not nothing, and it is worth understanding what you are signing before you sign it — see personal guarantees on business loans, explained.

There is also a regulatory line worth knowing. Under section 16B of the Consumer Credit Act 1974, credit taken wholly or predominantly for business purposes is exempt from regulation as a consumer credit agreement where the credit provided exceeds £25,000. Below that figure, a sole trader or small partnership borrowing for the business generally does keep Consumer Credit Act protections. A limited company does not get them at all. In practice that means the £24,000 facility a sole trader takes and the £26,000 one sit on different sides of a legal line, and most people signing them have no idea.

You are not without recourse above that line. The Standards of Lending Practice for business customers, which are formally recognised by the FCA, apply to loans, commercial mortgages, overdrafts and credit cards for businesses with consolidated turnover up to £25 million, and apply in full where turnover is no more than £6.5 million. And the Financial Ombudsman Service can consider complaints from a business with an annual turnover under £6.5 million that either employs fewer than 50 people or has a balance sheet total under £5 million.

The decision rule

Match the product to the shape of the gap, not to what your bank happens to offer.

If the gap is a genuine timing mismatch of days or a few weeks, and you can clear it in full each month, use the card. Free money inside the interest-free window is free money, and the discipline of clearing it monthly is a useful forcing function.

If the gap is a few weeks but irregular, unpredictable and small relative to turnover, use the overdraft. It costs nothing when unused beyond the renewal fee, and its automatic nature means nobody has to remember to draw down at 4pm on a Friday.

If the gap is larger, recurs predictably, and you want certainty that the facility will still be there in nine months, use the revolving credit facility and treat the non-utilisation fee as an insurance premium.

And if you cannot say when the money comes back, none of the three is the right answer. Short-term borrowing that never gets repaid is the most expensive debt a small business carries, because it is priced as short-term and lived in as long-term. Work out the true cost of the alternatives properly first — what a business loan really costs once you convert a flat rate to an APR usually reframes the whole question.

Common questions

Is a business overdraft cheaper than a business credit card?

It depends entirely on whether you clear the card in full each month. If you settle the statement balance by the due date, purchases inside that statement period carry no interest at all, which makes the card the cheapest short-term borrowing available. If you let the balance roll, card rates are typically the highest of the three products by a wide margin and interest compounds monthly, so the card becomes the most expensive. An overdraft charges interest daily on the balance you are actually overdrawn, usually at a lower rate, plus an annual renewal fee on the limit whether you use it or not. Cards reward discipline; overdrafts do not punish its absence as harshly.

Can my bank withdraw my business overdraft?

Yes. Business overdrafts are almost always repayable on demand, and they are typically granted for a fixed period of no more than twelve months and then reviewed. That means the bank can reduce or remove the limit at the review point, and in principle can call it in before then. This is the main structural difference from a revolving credit facility, which is normally committed for a defined term such as twelve or twenty-four months. If your account is overdrawn on the lowest day of most months, you are relying on a facility that can be pulled to fund something that is not going away — which is a different and larger problem than the interest rate.

What is a non-utilisation fee on a revolving credit facility?

It is a charge on the part of your agreed limit that you are not currently drawing, usually expressed as a small annual percentage. If you have a £30,000 facility, draw £20,000 and the non-utilisation fee is 1%, you pay that 1% on the undrawn £10,000. It exists because the lender has committed capital to you that it cannot lend elsewhere, and it is effectively the price of the facility being guaranteed to be there when you need it. Judge it as an insurance premium rather than as interest: the question is whether certainty of access over the next twelve months is worth that annual cost to your business.

Does the Consumer Credit Act protect business borrowing?

Sometimes, and the boundary catches people out. Under section 16B of the Consumer Credit Act 1974, credit taken wholly or predominantly for business purposes is exempt from regulation where the credit provided exceeds £25,000. Below that threshold, an unincorporated business such as a sole trader or small partnership generally does retain Consumer Credit Act protections; a limited company does not get them regardless of size. Separately, the Standards of Lending Practice for business customers cover loans, overdrafts, commercial mortgages and credit cards for firms with turnover up to £25 million, and the Financial Ombudsman Service can consider complaints from businesses turning over under £6.5 million that meet its size tests.

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