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Overdraft vs Merchant cash advance: which is right for your business?
The main difference between a business overdraft and a merchant cash advance is how they are secured and repaid: a business overdraft suits established businesses with regular deposits and short, recurring cash-flow gaps, while a merchant cash advance suits card-heavy retail and hospitality businesses with seasonal swings and an urgent, short-term need.
Overdraft vs Merchant cash advance at a glance
| Business overdraft | Merchant cash advance | |
|---|---|---|
| What it is | A business overdraft is an approved limit attached to your business transaction account that lets the balance go below zero up to that limit, with interest charged only on the negative balance. It is designed to absorb short timing gaps, not to fund long-term purchases. | A merchant cash advance is a lump sum advanced against your future card sales, repaid by taking an agreed percentage of each day’s card takings until a fixed total is repaid. It is priced with a factor rate rather than an interest rate, and it is one of the most expensive forms of business funding. |
| Amount | $10,000 – $500,000 | $5,000 – $300,000 |
| Term | 12–12 months | 3–18 months |
| Indicative rate | 8.5% – 19.5% p.a. | 25% – 60% p.a. |
| Rate type | Variable | Factor rate |
| Security | Unsecured (guarantee may apply) | Unsecured (guarantee may apply) |
| Repayments | No set repayment — deposits reduce the overdrawn balance | A set percentage of daily card settlements |
| Typical speed | 3–10 business days depending on security | 24–48 hours |
| Best for | Established businesses with regular deposits and short, recurring cash-flow gaps | Card-heavy retail and hospitality businesses with seasonal swings and an urgent, short-term need |
| Consider the other if | Funding an asset purchase or any expense you will repay over years | Businesses paid by invoice or bank transfer, or anyone who would qualify for a conventional term loan |
| Tax | Interest and line fees on business-purpose overdrafts are generally deductible. Confirm with your accountant. | The cost of a business-purpose advance is generally deductible. Confirm the treatment with your accountant. |
Rates shown are indicative ranges observed across our lender panel for the period stated. They are not an offer or quote. Your rate depends on your business, the lender, the amount, the term and the security offered. The lender makes the final credit decision.
When to choose a business overdraft
A business overdraft is usually the better fit for established businesses with regular deposits and short, recurring cash-flow gaps. Its main advantages are interest only on the days you are overdrawn, no drawdown request — it works through your existing account, automatically repays as customers pay you. Consider the alternative if funding an asset purchase or any expense you will repay over years.
When to choose a merchant cash advance
A merchant cash advance is usually the better fit for card-heavy retail and hospitality businesses with seasonal swings and an urgent, short-term need. Its main advantages are repayments fall automatically in quiet trading periods, fast funding with minimal documentation, no property security required. Consider the alternative if businesses paid by invoice or bank transfer, or anyone who would qualify for a conventional term loan.
Business overdraft
A business overdraft is an approved limit attached to your business transaction account that lets the balance go below zero up to that limit, with interest charged only on the negative balance. It is designed to absorb short timing gaps, not to fund long-term purchases.
Merchant cash advance
A merchant cash advance is a lump sum advanced against your future card sales, repaid by taking an agreed percentage of each day’s card takings until a fixed total is repaid. It is priced with a factor rate rather than an interest rate, and it is one of the most expensive forms of business funding.