An overdraft is technically a type of revolving credit, but the two products work very differently in practice. An overdraft is tied to your business current account and provided by your bank, letting you go into a negative balance up to an agreed limit. A revolving credit facility is a standalone agreement with a lender, your bank or another provider that lets you draw down, repay, and redraw funds up to a set limit, without having to reapply each time.
For UK businesses choosing between the two, the differences come down to flexibility, eligibility, term length, and who provides them. This guide walks through how each product works, when to use them, and what to expect when applying.
What is a business overdraft?
An authorised overdraft lets you take your business current account below zero, up to a pre-agreed limit. It’s a line of credit your bank extends on top of your account; even at a zero balance, you can keep withdrawing.
Key features:
- Provided only by the bank that holds your current account
- Available immediately as part of normal banking
- Interest charged on the negative balance
- Typically reviewed annually, and can be reduced or withdrawn by the bank
What is a revolving credit facility?
A revolving credit facility, sometimes called a business line of credit, operating line, or bank line, is a standalone credit agreement that lets a company borrow repeatedly up to a pre-agreed limit. Once you’ve repaid what you’ve drawn, the funds become available again, with no need to reapply.
It’s been described as taking a series of short-term loans without the friction of separate applications. Repayments are flexible: you can pay back larger amounts when cashflow is strong, and stick closer to the minimum during quieter periods. That makes the product particularly popular with businesses whose turnover is seasonal or unpredictable.
Comparison table
| Feature | Overdraft | Revolving Credit Facility |
| Provider | Your current account bank only | Any approved lender |
| Setup | Built into the existing account | Separate credit agreement |
| Typical limit | Lower; tied to account history | Higher for SMEs |
| Term | Often open-ended, reviewed annually | Fixed term (typically 1–3 years) |
| Eligibility | Existing business account holders | Usually limited companies, often 1+ year trading |
| Repayments | Reduces with account credits | Flexible, pay more when cashflow allows |
| Speed to access | Immediately once approved | Quick, once set up, the application required |
| Best for | Day-to-day buffer, smaller balances | Larger working capital, seasonal cashflow |
Key differences explained
Provider choice. Your overdraft has to come from your current account bank; you have no option in the matter. A revolving credit facility can come from any of a growing number of specialist lenders, giving you room to compare rates and terms.
Term length. Overdrafts are usually open-ended but reviewed annually and can be reduced or withdrawn at the bank’s discretion. Revolving credit facilities run for a fixed term, typically one to three years for smaller businesses, and are often extendable with a good repayment record.
Eligibility. Overdrafts are relatively easy to access if you already have a business account in good standing. Revolving credit facilities almost always require you to be a limited company, with at least 12 months of trading history and clean financial statements. A personal guarantee from a director is often required.
Flexibility and limits. Revolving credit facilities tend to allow larger amounts, although individual drawdowns may be capped at roughly one month’s turnover. Overdrafts are typically smaller and less flexible in how you repay them.
When to use a revolving credit facility
Businesses commonly use revolving credit for:
- Managing seasonal or fluctuating cashflow
- Funding new product or service development
- Hiring and training new staff
- Purchasing stock or equipment
- Holding a safety net for unexpected bills or large repairs
- Sitting alongside a traditional business loan as additional flexible credit
Pros and cons at a glance
Revolving credit facility
- Pros: larger limits, choice of lender, flexible repayments, redraw without reapplying.
- Cons: terms vary widely between providers, personal guarantees are often required, and they are generally not available to sole traders or partnerships.
Overdraft
- Pros: simple, automatic, transparent terms, integrated with your account.
- Cons: limited to your existing bank, smaller limits, can be reduced or withdrawn at the bank’s discretion.
How to apply for a revolving credit facility
Applications are usually quicker than a traditional business loan, but lenders will still want to see:
- At least 12 months of trading (some lenders require longer)
- Up-to-date balance sheet, income statement, and cashflow statement
- A reasonable credit history
- A personal guarantee from one or more directors, in many cases
Read the full terms carefully before signing; interest rates, arrangement fees, and renewal conditions vary significantly between providers.
Conclusion
For UK businesses, the choice between an overdraft and a revolving credit facility usually comes down to scale and flexibility. If you need a small, simple buffer attached to your current account, an overdraft is hard to beat. If you need larger limits, more flexible repayments, or want to shop around for terms, a revolving credit facility is likely the better fit. If you’d like help comparing options across our lender panel, including iwoca and FIBR, get in touch with the team at Funding Bay, and we’ll walk you through the application.
