Business Overdraft vs Revolving Credit Facility: Key Differences for Directors

The critical on-demand distinction

A bank overdraft is technically repayable on demand. Your bank can withdraw the facility at any time without formal notice beyond what your terms require. In practice this rarely happens to well-run businesses, but it represents a structural fragility that directors should understand when relying on an overdraft for working capital.

A revolving credit facility is a committed product: once agreed, the lender cannot pull it unilaterally during the committed term unless a covenant breach or default event occurs. This provides more reliable access to liquidity for planning purposes.

Cost structure comparison

Overdraft interest accrues daily on the outstanding debit balance, often at a margin above the lender's base rate. There is typically no arrangement fee and no undrawn cost — you pay only when in the red.

A revolving facility carries an arrangement fee and a commitment (or non-utilisation) fee on the undrawn portion, usually 30–50% of the drawn margin. The drawn margin is often lower than an equivalent overdraft, so the economics favour the RCF for companies that draw heavily and consistently. Illustrative rates are not indicative of any offer.

Security and covenant requirements

Overdrafts below certain thresholds are frequently unsecured for established businesses with strong banking relationships. Revolving facilities, particularly above £250,000, more often carry a debenture over company assets and financial covenants — leverage or interest cover tests measured quarterly or annually.

Directors of smaller companies may prefer the lower administrative burden of an overdraft despite the structural disadvantage.