Bank Overdraft Definition
A bank overdraft can be defined as a flexible borrowing facility on a bank current account which is repayable on demand.It is essentially an extension of credit from a lending institution when an account reaches zero. The individual is allowed to continue withdrawing money even if the account has no funds in it. In this case, the account is said to be “overdrawn”.
The facility is provided by the bank for a particular fee and individuals or businesses are charged interest on the excess amount that is withdrawn for the length of time.
There is usually a limit on the amount that can be overdrawn from the account.
What advantages Bank Overdraft offers?
Bank overdrafts can help to facilitate better cash flow for businesses
As a business owner it’s important to maintain a steady form of cash flow. By making use of a business overdraft, a business may effectively improve cash flow.
It helps in maintaining a good track record.
As a business owner with a bank overdraft, this may help you to keep track of cash flow as well as how funds are flowing in and out of your company. This may help in terms of forecasting.
It helps to ensure that payments are made timeously.
Your bank account will always have funds available, so you won’t miss payments that are due.
There is less paperwork involved, compared to getting long term loans
An overdraft allows for flexibility. One may take out an overdraft whenever required
It offers great savings in the interest cost when compared to a normal loan taken on a fixed interest rate
Are there any disadvantages?
- Interest rates are often significantly higher
- There is a risk of reduction in the limit you my qualify for
- The overdraft may at times be secured against company inventory, which may put your company at risk06
- If you are a cheque account holder, contact your bank to find out how you can apply for a bank overdraft.
