Bank Overdraft

A flexible borrowing facility on a bank current account.

An overdraft agreed with your bank enables you to continue withdrawing money from your account even when it drops below zero, or ‘into the red’, to a certain maximum amount. It is, in effect, a loan, and as with any other loan, the borrower is required to pay interest on the outstanding balance.

How does it differ from other finance options?

A bank overdraft doesn’t result in cash flowing into your business – it is simply a certain amount to which a business is allowed to allow its account to become ‘overdrawn’. While it is a flexible form of finance, with the business only paying interest on the amount of the overdraft facility it actually uses, it should also be seen as a merely short-term one to cover temporary cash shortages.

Practical Application Example

“ Your overdraft with your bank may be a fixed amount for a set period – for example, £500 to be repaid within six months – or you may be given an ongoing limit for use whenever you like. ”