You can draw, repay and redraw on both products, so on the surface they look alike. The structural difference is what happens when the lender wants the money back.
You face one real choice here: an overdraft is repayable on demand, while a revolving credit facility has a committed term of one to three years. We rate that single distinction the thing that should decide it.
The Fundamental Difference
You should treat the right of recall as the headline, not a technicality. An overdraft can be withdrawn at limited notice however cleanly you have run it; a revolving facility cannot be pulled mid-term while you meet your obligations.
That matters the moment you rely on either 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 trapdoor. That’s the whole comparison in one line.
| Feature | Overdraft | Revolving credit facility |
|---|---|---|
| Term | Repayable on demand | Committed, 1–3 years |
| Typical cost | 15–30% EAR | 6–12% (bank), 12–25% (fintech) |
| Undrawn fee | Usually none | Commitment fee 0.5–1.5% |
| Limit | Lower, harder to grow | Higher, scales with the business |
| Provider | Your bank only | Bank or independent lender |
How Overdrafts Work
You get an overdraft alongside your current account, and it activates automatically when the balance dips below zero. 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 transfers, the money is simply there when your account needs it. For small, occasional shortfalls, that suits a lot of businesses.
You take on real weaknesses too. Limits are typically lower than a dedicated facility, the pricing is opaque, and crucially the overdraft is repayable on demand — banks can reduce or withdraw it at 30 days’ notice or less.
How Revolving Credit Facilities Work
You apply for a revolving facility separately from your current account, and the limit is formalised in a credit agreement with a set term. Within that term you draw when you need to, repay, and redraw, paying interest only on the drawn balance.
You gain certainty from the committed term. For the duration of the agreement, provided you meet your obligations, the facility can’t be withdrawn — certainty you can build your cash flow forecast on.
A facility can also sit with a lender other than your own bank. That separation gives you flexibility: switch your day-to-day banking without disturbing your working capital. We rate that independence an underrated benefit.
Rate and Cost Comparison
You pay 15 to 30% EAR on a typical authorised overdraft, and the headline rarely tells the whole story, because arrangement fees, annual fees and daily interest combine into a drag on your cash flow that’s hard to model.
A revolving facility from a bank runs 6 to 12% annualised for established businesses, often materially cheaper than the overdraft it replaces; specialist and fintech lenders sit at 12 to 25% for younger firms.
Most facilities carry an arrangement fee of 1 to 3% upfront and may add a commitment fee of 0.5 to 1.5% on the undrawn portion. You pay that fee whether you draw or not, so size the facility to what you use. That’s the catch.
You come out ahead with the facility if you use working capital regularly, once the full cost is modelled. We find the overdraft only wins for a business that dips in rarely and has a strong bank relationship.
Limit Size and Scalability
You’ll usually find an overdraft caps lower than a dedicated facility, and raising the limit means a fresh negotiation with the bank each time your cash flow grows. The product was never built to scale.
A revolving facility is sized to your turnover and can be reviewed up as the business grows, and an invoice-backed facility scales with your sales ledger automatically. We rate that headroom the deciding factor for a growing business.
Banking Relationship Dependency
You tie yourself to one bank with an overdraft, and to that bank’s discretion. A relationship manager can ring on a Tuesday to flag a review, and the limit can be halved by the end of the month — the entitlement to do it sits in the small print.
You break that dependency with a facility from an independent lender. Your working capital no longer rides on one bank’s risk appetite, and you can move your current account without putting the facility at risk. That resilience is worth paying a little for.
Which to Choose
You should choose a revolving credit facility if you need working-capital headroom consistently, want certainty the lender can’t pull, or expect to grow. For most businesses leaning on the facility every month, it’s the better-structured product.
You can stay on the overdraft if you dip in only occasionally, value the convenience, and have a strong, stable bank relationship. For a genuine once-in-a-while buffer, the simplicity can outweigh the higher rate.
Either way, price it against your alternatives on a like-for-like basis. A committed facility at 9% beats a 25% overdraft you can lose at a month’s notice. Cheapest on the headline is not always cheapest in total.
Revolving Credit vs Overdraft FAQs
Is a revolving credit facility cheaper than an overdraft?
Usually, for regular use. A bank revolving facility at 6–12% typically undercuts a 15–30% overdraft once you model the full cost, and you pay interest only on what you draw. The overdraft can win only for rare, small dips where the commitment fee would outweigh the saving.
Can the bank withdraw a revolving credit facility like an overdraft?
Not during the committed term, unlike an overdraft. An overdraft is repayable on demand and can be cut at 30 days’ notice or less. A revolving facility can only be pulled mid-term if you breach a covenant, and otherwise runs to its renewal date.
Which is faster to arrange, an overdraft or a revolving facility?
An overdraft on your existing account is quickest once the limit is set. A new facility takes longer, though fintech revolving lines can be arranged within a day or two using Open Banking, far faster than a traditional bank facility.
Which scales better with a growing business?
A revolving facility. Overdraft limits are lower and need a fresh negotiation to raise, while a revolving facility is sized to turnover and can be reviewed up — and an invoice-backed facility grows with your sales ledger automatically.
Do both need a personal guarantee?
Often, yes. Most committed facilities for a limited company take a director’s personal guarantee, and many bank overdrafts do too. Read the guarantee carefully, because it puts your own assets behind the borrowing if the company can’t repay.
Methodology and Disclosure
How we compared revolving credit and overdrafts
Scope. We compared committed revolving credit facilities and business overdrafts on structure, cost, limits, scalability and banking-relationship risk, using provider documentation rather than aggregator marketing.
Data sources. Rates and fees were checked against provider pricing and the Bank of England base rate (3.75% as of June 2026). Cost figures are typical ranges, not quotes.
Update cadence. We re-verify these figures when the base rate moves or a provider changes pricing. The verification date reflects the most recent review. Some links on this page are affiliate links; see our editorial policy.
Regulatory note. This page is editorial content, not regulated financial advice. Facilities to limited companies are usually unregulated commercial finance, so Financial Ombudsman and FSCS protections may not apply. Compare offers directly with providers before you apply.