The Fundamental Difference
Both products let you draw money, repay it, and draw again. The structural difference is what happens when the lender wants it back.
An overdraft is repayable on demand. The bank can withdraw it with limited notice, regardless of how cleanly you have run it. A revolving credit facility has a committed term, typically one to three years, during which the lender cannot pull it unilaterally.
That distinction sounds technical. It is not. If you rely on either product to make payroll on the 28th or settle a supplier run at month-end, the right to recall is the difference between a working capital tool and a planning risk you have not properly priced in.
How Overdrafts Work
A business overdraft sits alongside your current account. When the balance dips below zero, the overdraft activates automatically. You pay interest only on the negative balance, and the facility resets as money comes in.
The convenience is real. No separate application once the limit is set. No transfer between accounts. The money is simply there when the account needs it. For a business with small, occasional shortfalls, that simplicity has genuine value.
The weaknesses are equally real. Overdraft limits are typically lower than dedicated revolving credit facilities. Rates are rarely transparent, with arrangement fees, excess fees, and daily interest combining in ways that make the true cost hard to model in a forecast.
And crucially, the facility is repayable on demand. Banks reserve the right to withdraw or reduce overdraft limits with limited notice, typically 30 days or less.
Relationship managers have rung on a Tuesday to flag a review, and the limit halved by the end of the month. The legal entitlement to do that is sitting in the small print of every overdraft agreement.
How Revolving Credit Facilities Work
A revolving credit facility is a separate product from your current account. You apply for a credit limit, which is formalised in a credit agreement with a set term. Within that term, you draw when you need cash, repay when it arrives, and the limit resets. Interest accrues only on the drawn balance.
The committed term is the key advantage. For the duration of the agreement, provided you meet your obligations, the facility cannot be withdrawn. That certainty is directly useful for a business running regular working capital cycles, because you can plan around it.
Revolving credit facilities can be arranged with lenders other than your bank. That separation gives you flexibility. You can switch your day-to-day banking without disturbing your working capital, and you can negotiate the two products independently rather than letting one provider hold both ends of the rope.
Rate and Cost Comparison
Overdraft rates are typically 15 to 30% EAR for authorised facilities. The pricing is rarely presented clearly, with arrangement fees, annual fees, and daily interest combining to produce a total cost that is higher than the headline rate suggests.
Revolving credit facilities from banks run at 6 to 12% annualised for established businesses, often materially cheaper than an overdraft. Specialist lenders and fintech providers sit at 12 to 25% for shorter-tenured borrowers.
Most facilities carry an arrangement fee of 1 to 3% upfront and may carry a commitment fee of 0.5 to 1.5% annualised on the undrawn portion. That commitment fee catches people out. You pay it whether or not you use the line.
For businesses using working capital finance regularly, a revolving credit facility is almost always cheaper than an overdraft once the full cost is modelled. The exception is a business that only needs a very small, occasional buffer and has a strong banking relationship. In that case, an overdraft is simpler to obtain and sufficient for the purpose.
Limit Size and Scalability
Overdraft limits are set by the bank and tied to your current account. Increases require a new application and are at the bank’s discretion. Businesses that have grown faster than the bank is willing to accommodate often find the overdraft limit becomes the binding constraint on their working capital, not the trading itself.
Revolving credit facilities can be structured at higher limits and with specialist lenders who may be more willing to grow the facility as the business grows. For a business that has outgrown its overdraft, a revolving facility is the natural next step, not a slightly larger version of the same product.
Banking Relationship Dependency
An overdraft is tied to your business current account. Moving banks means reapplying for a new overdraft with the new provider, which takes time and is not guaranteed. If your bank relationship deteriorates, the overdraft is exposed alongside it.
A revolving credit facility arranged with a separate lender is independent of your current account. Your banking relationship and your working capital facility can be managed apart, which gives you genuine optionality.
You can move banks, renegotiate each product on its own merits, and avoid being locked into a bundle where one weak limb compromises the other.
Which to Choose
Start with what you actually use the facility for. If it covers small, occasional shortfalls of a few days and the limit has always been adequate, an overdraft is probably sufficient. The simplicity is worth something if you rarely lean on it.
If the facility is structural working capital rather than an occasional buffer, if you consistently lean on it to cover payroll or supplier runs, or if you have grown beyond what the bank will extend, a revolving credit facility is the better-designed product.
It is almost certainly cheaper, and the committed term removes the planning risk that an on-demand overdraft carries. Get this call wrong and the consequence is concrete: a 30-day notice landing in the week you needed the line most.
If you are starting from scratch and have 12 or more months of trading history, approach your existing bank first for a revolving facility. If declined, or if the limit offered is too low, specialist lenders including Allica Bank, iwoca, and Funding Circle offer revolving products at higher rates with faster decisions.
How We Checked This
Rate ranges for overdrafts and revolving credit facilities reflect published UK bank and specialist lender product terms as of April 2026. Overdraft EAR ranges sourced from major UK high-street banks. RCF rates from Allica Bank, iwoca, and Funding Circle. Specific rates depend on trading history, credit profile, and lender assessment. Verify directly before applying.