Revolving credit facility vs business overdraft: which suits your cash flow?

The main difference in a revolving credit facility vs business overdraft comparison is where the facility sits and how long you can rely on it. A business overdraft is attached to your existing bank account, arranged only through your bank, and can be reduced or withdrawn at short notice. A revolving credit facility can be arranged with any lender, usually offers a higher limit, and is agreed for a fixed term, giving you more certainty over how long the funding will last. Both let you draw down, repay and reuse funds without reapplying each time, so the right choice often comes down to size, certainty and who you already bank with. This guide sets out how each option works, what they typically cost, how their limits and terms compare, and how to decide which fits your business, or whether it makes sense to hold both at once.

Revolving credit facility vs business overdraft at a glance

What is a revolving credit facility and how does it work?

A revolving credit facility gives your business an agreed credit limit that you can draw against whenever you need to, with funds paid directly into your bank account. Once you repay what you have borrowed, that portion of your limit becomes available again without a fresh application, and you only pay interest on the funds you have actually drawn down. It is agreed for a fixed term, typically 6 to 24 months, so the facility cannot be pulled or reduced part way through as long as you keep up with repayments.

What is a business overdraft and how does it work?

A business overdraft is a facility attached to your business current account that lets you spend more than the balance you hold, up to an agreed limit. You only pay interest on the amount you draw, and once you repay it, the full facility becomes available again without needing to reapply.

Unlike a revolving credit facility, an overdraft is not agreed for a fixed term. Your bank can review, reduce or withdraw it at short notice, even if that disrupts your cash flow, which makes it better suited to short term gaps than funding you plan to rely on for months at a time. Our guide to the pros and cons of a business overdraft covers eligibility, costs and risks in full.

How do the costs compare?

A business overdraft usually looks cheaper on paper, since it is priced off the Bank of England base rate, currently 3.75%, plus a margin of roughly 3% to 8%, working out at around 6.75% to 11.75% EAR on drawn balances. A revolving credit facility typically costs more per month, around 1% to 4% on funds drawn, which works out at roughly 12% to 50%+ representative APR depending on your risk profile, plus an arrangement fee of around 1% to 3% of the agreed limit.

The overdraft's lower headline rate comes with a trade off. Rates move with the base rate, so your cost of borrowing can rise without warning, and the bank can review or reduce your limit whenever it likes. A revolving credit facility may cost more, but the rate and limit are locked in for the term, so you know exactly what you are working with until the facility comes up for renewal. If your borrowing need is small, short and tied to your existing bank, an overdraft is usually the cheaper route. If you need a larger, more reliable facility that will not be pulled from under you, the extra cost of a revolving credit facility often pays for the certainty it provides.

How do credit limits and terms compare?

Revolving credit facility limits are generally set around one month's turnover, extending further for established businesses with a strong trading history, and agreed for a fixed term of 6 to 24 months before review. Business overdraft limits tend to be smaller, set by your bank against your account history and credit profile, and can be adjusted or recalled at any point rather than running for a set term. A stronger business credit score tends to unlock a higher limit and a better rate on either product, so it is worth checking where you stand before you apply for either one.

Which is better for short term gaps versus larger or ongoing costs?

A business overdraft is the better fit for small, unpredictable gaps, such as a late payment from a customer or a one off seasonal dip, where you only need a modest buffer for a short period. A revolving credit facility is the better fit for larger or recurring costs, such as restocking ahead of a busy period, covering payroll between invoice payments, or any cash flow gap you expect to manage for months rather than days.

Consider a revolving credit facility if:

• You need a higher limit than your bank is likely to offer as an overdraft

• Your funding need is tied to stock, payroll or a recurring cash flow gap

• You want certainty that your limit will not be reduced or recalled mid term

• You are comfortable paying a higher rate in exchange for that certainty

Consider a business overdraft if:

• Your funding need is small, short and genuinely temporary

• You already have a strong relationship and account history with your bank

• You want the lowest headline rate available and can absorb some rate variability

• You are confident your bank will not need to reduce your limit while you rely on it

Can you have a revolving credit facility and a business overdraft together?

Many businesses hold both at the same time, and there is no reason not to if your overall borrowing is manageable. In practice, this often works well: an overdraft handles small, everyday fluctuations in your account balance, while a revolving credit facility sits alongside it as a larger, more reliable source of funding for bigger or ongoing costs. A funding specialist can help you work out how much borrowing your business can comfortably support across both.

What do lenders and banks check before approving either option?

Lenders and banks assess a revolving credit facility and a business overdraft in a broadly similar way, looking at:

• Whether your business is registered and trading in the UK

• Your trading history, though minimum requirements vary widely by lender and bank

• Your monthly turnover and recent cash flow, usually evidenced through bank statements

• Your business and personal credit history

Revolving credit facilities are usually offered to limited companies rather than sole traders, while a business overdraft is generally only available to businesses that already hold a current account with the bank providing it. If you do not meet every criterion above, Capitalise also works with specialist lenders who consider businesses with a shorter trading history or an imperfect credit record.

Apply for the right funding for your business

Whether your business needs the higher limit and certainty of a revolving credit facility, or the everyday flexibility of a business overdraft, we can help you compare your options. Apply through Capitalise to compare offers from our panel of 130+ UK lenders, with a dedicated funding specialist on hand to talk you through rates and terms.