How do the three compare at a glance?
| Overdraft | Line of credit | Term loan | |
|---|---|---|---|
| How you access it | Your transaction account goes below zero | Draw from a separate approved limit | One lump sum paid out |
| Repayment | Balance recovers as deposits land | Repay any time, then redraw | Fixed schedule |
| Reusable? | Yes | Yes | No — reapply for more |
| Typical use | Day-to-day timing | Seasonal and recurring gaps, BAS and payroll timing | Vehicles, plant, fit-outs, acquisitions |
| Usually provided by | Your main bank | Banks and non-bank lenders | Banks and non-bank lenders |
How does a business overdraft work?
An overdraft is a limit attached to your everyday business account. When payments go out faster than money comes in, the balance dips below zero, up to the limit. As customers pay, it recovers.
Overdrafts are convenient because they sit quietly in the background until you need them. The trade-offs: they’re usually tied to your main bank, banks can be cautious with seasonal or younger businesses, and the bank can review or reduce the limit — sometimes at the moment you’re leaning on it most. It’s also worth checking what secures yours: the Reserve Bank estimates that roughly half of smaller business loans are backed by residential property, often the owner’s home.
How does a line of credit work?
A business line of credit is a revolving limit, often from a non-bank lender, that you draw into your account as needed. Repay part or all of it and that amount is available again. It covers the same kind of timing gaps as an overdraft, but sits apart from your transaction account and is assessed on your turnover and business bank statements.
Lines of credit usually suit businesses trading for six months or more. They’re generally unsecured, weaker credit is considered, and decisions are sometimes made the same day. The Reserve Bank has reported strong growth in non-bank lenders’ share of small business lending since 2022, so there are more places to look than there once were.
How does a term loan work?
A term loan pays out a fixed amount, repaid on a set schedule over a short to medium term. It’s the right shape for things with a clear cost and a long life: a replacement refrigerated truck, a second excavator, a café fit-out, the deposit on buying a business.
Term loans can be unsecured, based on your trading, or secured. A property-secured top-up of $20,000 to $1m, secured on Australian property you or a supporting party own, suits larger amounts or situations where you’d rather not provide financials up front. It’s a lump sum, not a revolving facility.
Which one should you choose?
Ask three questions:
- Is the need temporary or long-lived? Temporary gaps suit revolving facilities; long-lived purchases suit term loans.
- Does it repeat? If you face the same squeeze every wet season or every quarterly BAS, revolving credit saves reapplying.
- How big is it? Unsecured limits are sized to turnover. Bigger needs may call for property security.
Common situations, matched
- Wages and super through a slow winter at a Gold Coast restaurant → line of credit or overdraft.
- A new tractor for a Sunraysia citrus grower → term loan.
- A quarterly BAS landing before a large progress claim is paid → line of credit, or a property-secured loan if an ATO balance has already built up.
- Buying a retiring competitor’s stock and customer list → term loan, possibly property-secured.
- Weekly container purchases for a Brisbane importer → revolving business credit.
What’s the mismatch to avoid?
The most common mistake is using a short-term tool for a long-term need. Funding a truck through a revolving limit leaves the balance lingering for years and eats the headroom you’ll want at the next BAS or the next quiet season. The opposite mistake — taking a fixed loan for a gap that lasts six weeks — means paying for money you aren’t using.
Our guide to the working capital cycle shows how to measure your gap so you can pick the right structure, and using business credit responsibly covers the habits that keep any facility working for you.
What about cost?
We don’t publish rates for any of these structures, because pricing depends on the lender, the security and your circumstances. Every facility is priced individually, and we look for the sharpest option available for your situation.
Not sure which you need?
That’s what the first conversation is for. Start the 60-second enquiry, tell us what the money is for, and a lending specialist will explain which structure — or which combination — fits your business. It’s free and doesn’t affect your credit score.