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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 cafés, restaurants, salons, bars and retailers with steady card sales that need funds fast for stock, a fit-out, equipment or a busy season.
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 automatically as a small share of each day’s card takings until an agreed total is repaid. Approval is fast, no property security is needed, and repayments rise and fall with your trade. |
| 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 | Cafés, restaurants, salons, bars and retailers with steady card sales that need funds fast for stock, a fit-out, equipment or a busy season |
| Consider the other if | Funding an asset purchase or any expense you will repay over years | Businesses paid mostly by invoice or bank transfer, where invoice finance or a line of credit usually fits better |
| 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 are indicative, change without notice and depend on the lender, product, asset, term and your credit profile at the time of application. They are not an offer of finance. Comparison rates, where shown, are true only for the example given.
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 cafés, restaurants, salons, bars and retailers with steady card sales that need funds fast for stock, a fit-out, equipment or a busy season. Its main advantages are repayments fall automatically in quiet trading periods, funding in 24–48 hours with minimal documentation, no property security required. Consider the alternative if businesses paid mostly by invoice or bank transfer, where invoice finance or a line of credit usually fits better.
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 automatically as a small share of each day’s card takings until an agreed total is repaid. Approval is fast, no property security is needed, and repayments rise and fall with your trade.