Quick answer
A business overdraft or line of credit gives you a limit you can draw on and repay as needed, paying interest only on what you use plus any line or facility fees. In New Zealand, overdrafts usually come from your transaction bank, while lines of credit are offered by banks, non-banks and online lenders. They suit fluctuating needs like seasonal gaps and late-paying customers. Compare limits, line fees, review terms and security.
Key points
- Draw, repay and redraw up to a limit; pay for what you use plus fees.
- Overdrafts sit on your bank account; lines of credit may be separate facilities.
- Line, facility and review fees apply even when unused.
- Limits can be reviewed and reduced, so don't rely on them for long-term needs.
Some market items are bought once. Others you top up every week. An overdraft or line of credit is the top-up kind: a limit you dip into when cash runs low and refill when customers pay. Used well, it smooths the bumps. Used badly, it becomes an expensive permanent debt that never quite goes away.
How do overdrafts and lines of credit work?
You’re given a limit, say $50,000. You draw what you need, when you need it, up to that limit. You pay interest only on the amount you’re using, and repaying frees up the limit again. business.govt.nz describes a line of credit as a set amount of credit available from a lender (or a supplier), which is exactly the idea.
| Feature | Overdraft | Line of credit |
|---|---|---|
| Where it sits | On your business transaction account | Usually a separate facility |
| How you draw | Your account goes below zero | You draw into your account |
| Typical providers | Your transaction bank | Banks, non-banks, online lenders |
| Security | Often a general security; sometimes property | Varies from unsecured to property-secured |
| Review | Periodic | Periodic or ongoing |
When does borrowing on tap make sense?
Credit lines are built for needs that go up and down:
- seasonal businesses carrying costs before the busy months;
- businesses waiting on customer payments, such as trades on progress claims;
- covering tax payments like GST and provisional tax while cash catches up;
- buying stock ahead of peak demand; and
- keeping a safety buffer for the unexpected.
They’re less suited to one-off purchases or long-term needs, where a term loan is usually cheaper and steadier. If the gap is caused specifically by unpaid invoices, invoice finance can grow with your sales in a way a fixed limit can’t.
What does a credit line cost?
This is where shopping gets fiddly, because some costs apply whether you use the facility or not:
- Interest on what you draw.
- Line, limit or facility fees, charged on the limit, often monthly or annually.
- Establishment fees.
- Draw fees, charged each time you draw (common with online lines of credit).
- Annual review fees.
- Excess or unarranged fees if you go over the limit.
The best way to compare is to model a typical year. Estimate your average drawn balance and how often you draw, then add every fee. A facility with a low price on drawn funds but a hefty line fee can cost more than one with a slightly higher price and no line fee, especially if you rarely use it. Our total cost of finance page shows the method.
Not sure what limit you need? A cash-flow forecast helps, and so does a quick enquiry with us, which involves no credit check.
How does a forecast help you shop?
business.govt.nz suggests building a cash-flow forecast with pessimistic, realistic and optimistic scenarios, including known costs such as loan repayments and tax. That same forecast is your best shopping tool for a credit line. It shows how big the limit needs to be, how many months you’ll actually draw on it, and whether a fee on the limit or a fee per draw would cost less over the year. Lenders like it too: a business that can show when and why it will use a facility, and how it will come back down, looks like a safer customer.
How big should your limit be?
Big enough to cover your deepest regular trough, plus a buffer; not so big that you pay heavy line fees on unused headroom. A simple approach:
- Map the last 12 months of bank balances.
- Find the lowest points and what caused them.
- Forecast the next 12 months with known tax dates, seasonal costs and big orders.
- Size the limit to cover the forecast low points with a sensible margin.
What fine print matters most?
- Review and cancellation. Many facilities can be reviewed, reduced or cancelled by the lender. Know the notice terms.
- Repayable on demand. Some overdrafts are technically repayable on demand. That’s rarely used, but it’s a risk if your circumstances change.
- Security. A general security agreement over the business, or property, may be required.
- Clean-up requirements. Some facilities require the balance to return to zero or below a level for a period each year.
- Covenants. Minimum turnover or reporting conditions.
What does a good credit-line choice look like?
Illustrative example. A Canterbury irrigation contractor earns most of its revenue from October to March but carries wages and equipment costs all year. Its bank offers a $120,000 overdraft with an annual line fee and a general security. An online lender offers a $100,000 line of credit with no line fee but a fee on each draw. The contractor’s forecast shows it will draw heavily for four months and barely at all for the rest of the year. Modelling both, the bank overdraft is cheaper in heavy months while the online line costs less when unused. The contractor chooses the bank overdraft for its lower running cost during the critical months and asks for a smaller limit to reduce the line fee.
When is a credit line a warning sign?
If your overdraft has been at or near its limit for months, it’s no longer smoothing bumps; it’s funding a permanent shortfall. That’s usually more expensive than a term loan, and it leaves no buffer for genuine surprises. Consider converting the hard-core balance into a term loan and keeping a smaller line for true fluctuations.
Want a facility that flexes with your business?
Tell us about your cash-flow pattern and what you’d like the limit for. There’s no credit check to enquire, and we don’t hand your details around to a stack of lenders; a real person looks at your situation and calls you. Please give accurate turnover and timing details on the form, so the facility we help you find matches your actual cycle. See if you qualify.
Frequently asked questions
What's the difference between a business overdraft and a line of credit?
An overdraft is a limit attached to your business transaction account, so the balance simply goes below zero. A line of credit is usually a separate facility you draw from into your account. Both work on a draw-and-repay basis; fees, security and flexibility vary by lender.
Do I pay for an overdraft I don't use?
Often, yes. Many facilities charge a line, limit or facility fee based on the limit, whether or not you draw on it. Ask for the annual cost of the facility at zero usage.
Can a lender reduce or cancel my overdraft?
Many facilities are reviewed periodically, and the terms usually allow the lender to change or cancel the limit, sometimes on notice. Read the review and repayment-on-demand clauses.
Is a line of credit good for long-term borrowing?
Generally not. Credit lines suit short, fluctuating needs. A permanent overdrawn balance often signals that a term loan would be cheaper and more stable.