The short version
| Overdraft | Line of credit | Term loan | |
|---|---|---|---|
| How you access it | Your transaction account goes below zero | Draw from a separate limit | Lump sum paid out once |
| Repayment | Balance clears as deposits arrive | Repay any time, redraw | Fixed schedule |
| Reusable? | Yes | Yes | No — reapply for more |
| Typical use | Day-to-day timing | Seasonal and recurring gaps | Equipment, vehicles, 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 customer payments land, the balance recovers.
Overdrafts are convenient because they’re invisible until needed. The trade-off is that they’re usually tied to your main bank, and banks may be cautious with seasonal or younger businesses. An overdraft can also be reviewed or reduced by the bank, which is worth knowing if your business relies on it.
How does a line of credit work?
A 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 becomes available again. It’s built for the same kind of timing gaps as an overdraft, but sits separately from your transaction account and is assessed on your turnover and bank statements.
Lines of credit usually suit businesses trading for six months or more. Weaker credit is considered, and decisions are sometimes made the same day.
How does a term loan work?
A term loan pays out a fixed sum and is 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 new chiller, a second delivery van, a café fit-out, the deposit on buying a business.
Term loans can be unsecured (based on your trading) or secured. A property-secured loan of $20,000 to $1m, secured on New Zealand property you or a supporting party own, can suit bigger amounts or situations where you don’t want to provide financials up front.
Which should you choose?
Ask yourself three questions:
- Is the need temporary or long-lived? Temporary gaps suit revolving facilities. Long-lived purchases suit term loans.
- Does the need repeat? If you’ll face the same squeeze every winter, revolving credit saves you reapplying.
- How big is it? Unsecured limits are sized to turnover. Bigger needs may call for security.
Situations, matched
- Wages over a slow July in a Queenstown restaurant → line of credit or overdraft.
- A new tractor for a Gisborne orchard contractor → term loan.
- GST and provisional tax landing in the same fortnight → line of credit, or a property-secured loan if a balance has already built up.
- Buying a competitor’s customer list and stock → term loan, possibly property-secured.
- Weekly stock purchases for a Wellington wholesaler → revolving line of credit.
The mismatch to avoid
The most common mistake we see is using a short-term tool for a long-term need. Funding a vehicle through a revolving line leaves the balance lingering for years and eats the headroom you’ll want next winter. The reverse mistake — taking a fixed loan for a gap that only lasts six weeks — means paying for money you’re not using.
Our guide on the working capital cycle explains how to measure your gap so you can pick the right structure.
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. It’s free and doesn’t affect your credit score.