Business overdraft vs line of credit: standby money compared

The short verdict

Choose a bank overdraft if your bank will give you one at a size that covers your dips. It’s usually the cheapest standby money available.

Choose a line of credit if your bank won’t offer an overdraft, won’t make it big enough, or takes too long — or if you want a standby facility that isn’t tied to your main bank.

How do they compare?

	Business overdraft	Business line of credit
Where it lives	Inside your transaction account	Separate facility, drawn into your account
Typical provider	Your bank	Banks and non-bank lenders
Relative cost	Usually lower	Usually higher (non-bank)
Approval	Bank credit policy, often needs financials and security	Often bank statements; more flexible criteria
Speed to set up	Varies — fast if your bank knows you	Moderate
Speed to use	Instant — you just spend	Near-instant draw
Fees	Interest on overdrawn balance, plus facility fees	Interest on drawn amount, plus line or account fees
Review risk	Can be reduced or cancelled	Can be reduced or cancelled
Visibility of use	Mixed with everyday transactions	Separate, easier to track

Why does “separate” matter?

An overdraft blends into your day-to-day banking. That’s convenient — and it’s also why overdrafts quietly become permanent. If your account has sat below zero for six months, you’re carrying a term loan without the structure of one.

A separate line of credit makes borrowing visible. You see each draw and each repayment. For some owners that discipline is worth a lot. For others, the convenience of an overdraft wins.

When does the overdraft win?

• Your bank offers one at a size that covers your dips.
• You qualify on its policy without extra security you’d rather not give.
• Your dips are small and short — a few days around wages or tax dates.
• You want the lowest cost.

When does the line of credit win?

• Your bank has declined an overdraft or offered too little.
• Your bank wants property security you don’t want to provide for a small facility.
• Your accounts are behind, so the bank can’t assess you yet.
• You want a standby facility separate from your main bank, for resilience.
• Your dips are larger than a typical bank overdraft for a business your size.

What does a typical dip look like?

Most small New Zealand businesses have predictable pinch points:

• Payday, especially when wages fall before customer payments arrive.
• The 20th, when small employers pay PAYE deductions for the previous month, according to Inland Revenue.
• GST due dates, depending on your filing frequency.
• Provisional tax instalments, for businesses in provisional tax.
• Seasonal troughs, such as winter for tourism or pre-Christmas for retail stock builds.

Illustrative example. A Wellington café has a $15,000 bank overdraft that covers fortnightly wages most of the time. But in winter, when takings fall, the account sits at its limit for weeks and the bank starts asking questions. The owner adds a non-bank line of credit as a backup for the quiet season, uses it for about three months a year, and keeps the cheaper overdraft for everyday dips.

What are the risks of relying on either?

• Reviews. Both banks and non-bank lenders can reduce or cancel facilities, often when trading weakens — exactly when you’d want them most.
• Drift. A facility that never returns to zero has become long-term debt.
• Fees on unused limits. Facility and line fees apply even when you don’t draw.
• Masking problems. Standby money can hide a business that’s slowly losing money.

A healthy standby facility goes up and down. If yours only goes down, it’s time to look at the underlying cash flow, and possibly convert part of the balance into a structured loan with an end date. See line of credit vs short-term loan for that decision.

What will the bank ask for an overdraft?

Banks typically want recent financial statements, sometimes a forecast, and often security — a general security agreement over business assets, or property. Non-bank lines of credit often rely more on bank statements. If your accounts are behind, that difference can decide which you can actually get this month.

Can you combine them?

Yes. A small overdraft for daily dips and a larger line of credit for seasonal or unexpected gaps is a common and sensible arrangement — as long as you know the combined fees. Our full page on the business line of credit explains how to size a limit.

What if you need money today and have neither?

Neither product is likely to be in place by this afternoon. For immediate needs, a short-term loan or a property-secured loan is the faster route; you can arrange a standby facility afterwards. See covering payroll and same-day business loans.

Bank overdraft too small? Ask about a line of credit in about a minute.

Quick checklist before you choose

Know your deepest monthly dip, how often you dip, what your bank will offer, and the fees on each option. Those four facts decide it.

Get standby money that fits your dips

The right standby facility depends on how often you dip, how deep, and what your bank will offer. There’s no credit check to enquire, and we don’t pass your details to a dozen lenders — one specialist looks at your pattern and calls you. Give us an accurate sense of your low points and any existing overdraft, and we’ll suggest a facility that complements it rather than duplicating it. Check your options.