01
What does each cost on the expected usage
Interest on the average drawn balance plus the fee on the limit, in dollars, from both providers on the same two numbers. That comparison is the whole of the price question.
Guide
Same arithmetic, different behaviour.
An overdraft and a line of credit calculate interest identically. What separates them is where the limit sits, and that turns out to change how businesses actually use them.
MS
Matt Stiles Editor
Published 8 September 2026 Last reviewed 8 September 2026 Read time 11 min
The short version
Five lines that separate them.
- The arithmetic is the same. Daily interest on the drawn balance, a fee on the limit, and a periodic review. Neither is cheaper by construction.
- An overdraft is used without deciding to. The account simply continues past zero, which is its convenience and its risk.
- A line requires a transfer. That small act of deliberation is the largest practical difference between the two.
- The provider differs. Overdrafts come from the bank holding the account. Lines come from banks and non-bank lenders, which widens the options.
- Indicative only. This is general information rather than advice, and every figure is illustrative.
Side by side
What actually differs, and what does not.
The rows marked as identical are where businesses expect a difference and there is not one.
| Feature | Business overdraft | Business line of credit |
|---|---|---|
| Interest calculation | Daily on the balance | Daily on the balance |
| Fee on the limit | Yes | Yes |
| Where the limit sits | On the trading account | Beside it, drawn deliberately |
| Drawing | Automatic | A transfer |
| Repaying | Automatic | A transfer |
| Typical provider | The business’s own bank | Banks and non-bank lenders |
| Visibility of borrowing | Blended into the account | A separate balance |
| Days lost to transfer timing | None | A few per cycle unless managed |
The last two rows describe a genuine trade. An overdraft is mechanically more efficient and behaviourally more dangerous, and a separately held line is the reverse.
The mechanical advantage
Why an overdraft costs slightly less to run.
Every deposit into the trading account reduces an overdrawn balance the moment it clears, and every payment draws on it exactly when the money leaves. There is no window between a receipt arriving and it being applied, and no window between drawing and spending. On a business cycling money through a facility regularly, those windows on a separately held line cost a few days of interest per cycle.
Across a year on an actively used facility that is a real number, and it is the reason a business already banking with a lender offering a competitive overdraft has a small structural advantage in choosing it.
It is a small advantage rather than a decisive one. Careful transfer discipline on a separate line closes most of the gap, and a better rate or a larger limit from another provider closes the rest of it easily.
The behavioural disadvantage
Why the same efficiency causes the trouble.
Borrowing that requires no decision is borrowing nobody decided on. An overdraft is drawn by the ordinary act of paying a supplier, and the business experiences the transaction as spending rather than as borrowing. That is why an overdraft balance can harden across a year without any moment that could be pointed to as the decision.
A separately held line requires a transfer, which is a small deliberate act with a number attached. It is not much friction and it is enough to make the borrowing visible, which changes how much of it happens.
The evidence for this is in how the two typically end up. Hardened core debt is a characteristic overdraft problem and a less common problem on separately held facilities, and the difference is not in the contracts.
Choosing
Four questions that decide between two offers.
02
How large a limit will each write
Frequently the deciding factor, and it varies more between providers than the rate does. A limit that is too small is a worse outcome than a rate that is slightly high.
03
How disciplined is the business
An honest answer matters more than it seems. A business with a history of hardened balances is better served by the friction of a separate facility even at a small cost.
04
What is the security position
Where a bank already holds a general security, a non-bank line will need a priority arrangement. That is routine and it takes time, and it is worth raising early rather than late.
The question that is not about price
Whether the business wants the borrowing to be visible.
A business that has run an overdraft for years and cannot say what its balance was six months ago is describing a facility it is not managing. Moving to a separate line changes nothing about the arithmetic and everything about whether the borrowing is seen, because a separate balance appears in the accounts as a facility rather than disappearing into the trading account. For some businesses that is worth more than a rate difference, and for others the mechanical efficiency of an overdraft matters more. Both answers are defensible and the question is worth asking explicitly.
Worked example
Two offers on the same requirement.
A business expecting an average drawn balance of $50,000 is offered a $120,000 overdraft at an indicative 14% with a 0.5% line fee by its bank, and a $150,000 line of credit at an indicative 15% with a 0.4% line fee by a non-bank lender.
The overdraft costs roughly $7,000 in interest and $600 in fee, which is $7,600. The line costs roughly $7,500 and $600, which is $8,100. On price the overdraft wins by around $500, and transfer timing on the line might add another $300 or so unless managed.
The line offers $30,000 more headroom, which for a business that has occasionally been tight is worth more than $800 a year. Neither answer is wrong, and putting both on the same basis is what makes the choice a decision rather than a preference.
Illustrative annual cost
- Overdraft interest
- ~$7,000
- Overdraft fee
- $600
- Line interest
- ~$7,500
- Line fee
- $600
- Additional headroom on the line
- $30,000
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
The trade
Where each has the advantage.
An overdraft is better for
- A business cycling money through the account frequently
- Anyone who values not having to think about transfers
- A relationship where the bank already holds the account and the security
- Absorbing an unexpected payment without a drawdown decision
- Mechanical efficiency, with no days lost to settlement timing
A separate line is better for
- A business that wants its borrowing visible as borrowing
- Access to non-bank lenders and a wider range of limits
- Keeping a facility with a different provider from the trading bank
- A business with a history of balances that harden
- Situations where the incumbent bank will not write a large enough limit
Switching
What moving from one to the other involves.
Replacing an overdraft with a separately held line is straightforward in principle and has one practical complication, which is the security position. Where the existing bank holds a general security agreement, a new lender will want a position of its own, and the two are resolved by an arrangement between them. That is routine and it takes time.
The other consideration is the drawn balance at the point of switching. An overdraft that is substantially drawn has to be repaid from the new facility, which means the new limit has to be large enough to cover the existing balance as well as future needs, and lenders assess it accordingly.
Where the overdraft has hardened, the honest sequence is frequently different: term out the permanent portion, keep a smaller overdraft or line for fluctuation, and end up with two facilities rather than one. That is a better structure and it is a different conversation from a straight switch.
Method
How this guide was written, and its limits.
The comparison describes general market practice in New Zealand. Individual products vary, particularly on whether a facility is committed, what a review may do, and whether a clean-down condition applies, and the agreement governs any particular case.
The figures are illustrative and calculated on stated assumptions rather than drawn from any provider’s pricing. Rates, fees and limits vary considerably, and the only numbers that matter are those a lender puts in writing.
Nothing here is financial advice. This site is not a lender, a broker or a registered financial adviser, and which facility suits a particular business depends on facts a website cannot see.
Getting comparable offers
Three steps that make two proposals answerable.
01
Give both providers the same two numbers
The limit sought and the average drawn balance the business realistically expects. Without those, one quote will be priced against a large limit and the other against a small one, and the rates will not be describing the same thing.
02
Ask each for the annual total in dollars
Interest on the stated average balance plus every standing charge. Two totals are directly comparable and two rates are not, and any lender can produce the figure in a few minutes.
03
Ask what each will actually write
The limit each provider will approve varies more between institutions than the rate does, and a limit that is too small is a worse outcome than a rate that is slightly high. It is worth establishing before the pricing conversation rather than after.
A middle path
Holding both, deliberately.
A modest overdraft on the trading account for everyday fluctuation, and a separate line for anything larger or longer, is a structure that suits a good number of businesses. The overdraft absorbs the noise without any decisions, and the separate facility makes larger borrowing deliberate and visible.
It also spreads the relationship. A business whose entire funding sits with one institution has limited room to move if that institution changes its appetite, and holding one facility elsewhere keeps an alternative warm.
The complication is security. Where the bank holds a general security agreement, a second lender needs a position of its own and the two are resolved by an arrangement between them. That is routine and it takes time, and it is worth raising at the outset rather than discovering it when the second facility is otherwise ready.
The failure modes
Each one goes wrong in its own way.
An overdraft fails by hardening. Because using it requires no decision, the balance can drift downward across a year with no moment that reads as a choice, and the business ends up carrying permanent debt at a rate priced for fluctuation.
A separately held line fails differently, by being forgotten. A facility that requires a transfer to use is also a facility that can sit undrawn while the trading account runs uncomfortably tight, because nobody made the transfer. That is a smaller problem and it is a real one, and the remedy is a rule about when the transfer happens rather than a judgement each time.
Knowing which failure a business is prone to is more useful than comparing the products in the abstract. A business that has hardened an overdraft before will do it again, and one that has held an unused facility while struggling has a different problem entirely.
The review difference
Two providers, two kinds of conversation.
A bank reviewing an overdraft is reviewing a facility on an account it holds, with complete visibility of every receipt and payment. It rarely needs to ask for anything, and its view is formed continuously rather than at the review.
A separate lender reviewing a line is working from what the business supplies, which means the review is an event with a document request attached. That is more administrative work and it is also an opportunity, because the business chooses what to present and can frame the year rather than having it read.
Neither is better, and the difference is worth knowing before choosing. A business with an untidy year may prefer the lender that has to be told; a business with a strong year and poor record-keeping may prefer the one that can already see it.
Two failure modes
How each facility goes wrong.
Both are behavioural rather than contractual, which is the point of this comparison.
An overdraft hardens
Borrowing that requires no decision drifts downward across a year, and the account stops returning to credit without any moment that reads as a choice.
What happens:Permanent debt at a rate priced for fluctuation, and a review conversation about core debt that the business did not see coming.
A separate line is forgotten
The facility sits undrawn while the trading account runs uncomfortably tight, because using it requires a transfer nobody made.
What happens:Avoidable pressure on suppliers and payments while capacity sat unused, which is a smaller problem than the first and a real one.
Knowing which of these a business is prone to is more useful than comparing the products in the abstract. Both are addressed by a rule about when the transfer happens or when the balance is checked, rather than by choosing differently.
The comparison
What each costs on the same drawn balance.
Both charge on what is drawn, so running the same average balance at each rate is what puts two offers on the same basis. The fee on the limit is added separately. Indicative only, and not a quote or offer of credit.
Indicative interest cost
Weekly
$135/week
$583 /month $7,000 a year while drawn
$120,000
$5,000 $500,000
$50,000
Nothing drawn Fully drawn
14.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $120,000 scenario
$50,000 drawn at 14.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Sources
- Reserve Bank of New Zealand, statistics
Context for New Zealand business lending rates and why indicative bands move.
- Personal Property Securities Register
Backs the description of priority arrangements required when moving between providers.
- Commerce Commission
The regulator whose guidance covers lender conduct and fee disclosure.
- Banking Ombudsman Scheme
The dispute resolution scheme relevant where a facility or a fee is in dispute with a participating bank.
- Financial Markets Authority, financial advice
Backs the distinction between general information of this kind and regulated financial advice.
FAQ
Questions, answered
Is an overdraft the same as a line of credit?
Mechanically almost identical. Both are revolving limits charging daily interest on the drawn balance with a fee on the limit. What differs is where the limit sits and, following from that, how the facility is used.
Which is cheaper?
Neither by construction. Price depends on the provider and the applicant, and the comparison that settles it is interest on the expected average drawn balance plus the fee on the limit, in dollars, from both offers.
Why does an overdraft cost slightly less to run?
Because every deposit repays it instantly and every payment draws it exactly when the money leaves. A separately held line loses a few days of interest per cycle to transfer timing unless that is actively managed.
Why do overdrafts harden more often?
Because using one requires no decision. The account simply continues past zero, so the borrowing is experienced as spending, and a balance can build across a year without any moment that reads as a decision.
Who provides each?
An overdraft ordinarily comes from the bank holding the trading account. A line of credit can come from a bank or a non-bank lender, which widens the range of limits and rates available.
What decides between two offers?
The cost on expected usage, the size of the limit each provider will write, an honest view of the business’s own discipline, and the security position. The limit size varies more between providers than the rate does.
Can a business hold both?
Yes, and it is occasionally sensible where a bank overdraft covers everyday fluctuation and a separate facility covers a larger or more specific need. The security arrangement between the two providers has to be sorted first.
What is involved in switching?
Resolving the security position between the outgoing and incoming lender, and ensuring the new limit is large enough to repay the existing drawn balance as well as fund future needs. Both take time and are routine.
Should a hardened overdraft simply be switched?
Ordinarily no. The better sequence is to term out the permanent portion at a lower rate and keep a smaller revolving limit for genuine fluctuation, which ends with two facilities and a lower total cost.
Does an overdraft look worse to another lender?
Not in itself. What a lender reads is the pattern: a facility that moves and clears reads well, and one sitting near its limit for a year reads as core debt whether it is called an overdraft or a line.
Does the visibility argument really matter?
For some businesses, more than the rate. A business that cannot say what its overdraft balance was six months ago is not managing the facility, and a separate balance that appears in the accounts changes that without changing the arithmetic.
Is this guide financial advice?
No. It compares two facilities in general terms. This site is not a lender, a broker or a registered financial adviser, and which suits a particular business depends on facts a website cannot see.
Related
Keep reading
Business overdraft
The facility in full.
Read onBusiness line of credit
The other half of the comparison.
Read onDrawdown and repayment mechanics
Why transfer timing costs money on a separate facility.
Read onAgainst a term loan
The comparison that comes before this one.
Read onAll eight facilities
Every revolving arrangement compared in the same shape.
Read on