Overdraft vs Revolving credit facility
Both let you draw and repay as needed. The essential difference is commitment. An overdraft is usually repayable on demand, while a revolving credit facility is committed for a fixed term, and that certainty costs money.
| Criterion | Overdraft | Revolving credit facility |
|---|---|---|
| Commitment | Usually on demand | Committed for a fixed term |
| Cost when undrawn | Little or none | A commitment fee applies |
| Documentation | Light | Full facility agreement |
| Covenants | Few on smaller limits | Financial covenants tested regularly |
| Typical size | Smaller, tied to the bank relationship | Larger, from a bank or a lender group |
| Renewal risk | Reviewed annually and can be withdrawn | Fixed until maturity, subject to covenants |
An overdraft is cheap precisely because the bank can reduce or withdraw it. In stable conditions that rarely matters. In a downturn, or after a weak set of results, it matters a great deal, and it tends to be withdrawn at the point the business most needs it.
A revolving credit facility cannot be pulled while covenants are met. You pay a commitment fee for that protection, and for many businesses it is the cheapest insurance available.
Compare the all in cost across a full year at your realistic average utilisation, not at the limit. An overdraft with a higher margin but no commitment fee can be cheaper for a business that draws rarely. A revolving facility usually wins where utilisation is consistently high.
Arrangement fees on a revolving facility are meaningful and are amortised over the term, so short terms make the effective cost higher than the headline margin suggests.
Overdrafts suit smaller businesses with modest, occasional swings and a settled banking relationship. Revolving facilities suit businesses whose working capital requirement is structural, seasonal and large enough to justify the documentation.
Where the requirement is genuinely driven by the sales ledger, a receivables facility often beats both, because availability grows with turnover instead of being fixed at a limit set last year.
Use an overdraft for small, occasional swings where cost matters more than certainty. Use a committed revolving facility where the requirement is structural and losing the line would damage the business.
Yes, and it is common to keep a small overdraft for daily clearing alongside a larger committed line.
Often around a third to a half of the drawn margin, applied to the undrawn balance.
Headroom usually is. Push for levels your downside case still passes, not just your base case.
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