Overdraft vs Line of Credit vs Invoice Finance: Choosing a Working Capital Facility
A business overdraft, a line of credit and invoice finance all help with cash flow, but they work differently. An overdraft or line of credit gives you a limit secured mainly by property or business assets. Invoice finance advances cash against your unpaid customer invoices, so the facility grows with your sales.
This post compares the three so you can work out which one fits your business before you talk to a lender. For the full range of business loan types, see our commercial finance guide.
How do the three compare?
| Overdraft | Line of credit | Invoice finance | |
|---|---|---|---|
| How it works | Your transaction account can go into debit up to a limit | A separate facility you draw and repay as needed | A lender advances a percentage of approved invoices |
| Main security | Property, GSA and/or director guarantees | Property, GSA and/or director guarantees | The receivables (debtor book), usually with a GSA |
| Limit set by | Security and serviceability | Security and serviceability | The value and quality of your invoices |
| How cost is charged | Interest on the debit balance plus a limit fee | Interest on drawn funds plus a line fee | A service or discount fee plus interest on funds advanced |
| Suits | Small, short-term timing gaps | Recurring or seasonal needs | B2B businesses growing faster than their cash |
Fees and structures vary widely between lenders. Compare the total dollar cost at your expected usage, not just the headline rate.
When does an overdraft make sense?
An overdraft suits small, short gaps between paying suppliers and getting paid, when you have security a bank is comfortable with. It is convenient because it sits on your transaction account. The trade-off is that banks typically review overdrafts regularly and can change or reduce the limit, so it isn't a substitute for long-term funding. More on business overdrafts.
When is a line of credit better?
A line of credit suits predictable, recurring needs, such as funding stock ahead of a busy season, where you want to draw and repay without reapplying. Some lines of credit are secured by property and priced closer to a term loan; others are unsecured with higher pricing and lower limits.
When does invoice finance fit?
Invoice finance fits businesses that sell on credit to other businesses and have cash tied up in invoices, particularly when they don't have property to offer as security. Because the limit is based on the debtor book, it can grow as sales grow. The lender will look closely at who your customers are, how concentrated the book is and how reliably those customers pay. Our posts on invoice finance costs and debtor book eligibility go into detail.
Questions to ask before choosing
- How large is the gap, how often does it happen and how long does it last?
- What security can the business (and you) offer, and are you comfortable offering it?
- What will the facility cost in dollars at the level you expect to use it?
- How often is the facility reviewed, and what could cause the lender to reduce it?
- Is the cash need actually short-term, or is it a sign the business needs longer-term capital?
Can you combine them?
Yes. Some businesses use a small overdraft for day-to-day timing and invoice finance for growth, or a line of credit alongside a term loan. The structure should match the cash cycle of your business. See working capital finance for how we approach it.