Bank Overdraft
Definition
When a current account holder permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. The banker may take some collateral security or may grant such advance on the personal security of the borrower. The customer is permitted to withdraw the amount as and when he needs it and to repay it by means of deposit in his account as and when it is feasible for him. Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilization.
Generally an overdraft facility is given by a bank on the basis of a written application and a promissory note signed by the customer. In such cases an express contract comes into existence. In some cases, in the absence of an express contract to grant overdraft, such an agreement can be inferred from the course of business.
Cash withdrawals from a bank account already overdrawn will automatically increase the size of the overdraft. An overdraft facility does not have a repayment timetable like most term loans; therefore a business that uses an overdraft facility pays interest only for the period the bank balance is overdrawn or is in negative territory. Interest on a bank overdraft is highly volatile and is paid or accrued daily.
Bank overdrafts are acquired to cover temporary short term shortage of cash resources. A bank overdraft may be acquired for example; to finance on going working capital requirements or to support a start up business when it is still trying to find its feet.
Advantages of an Overdraft
An overdraft facility is a very useful form of funding particularly to small to medium businesses and to business start ups because these usually struggle for cash. In most cases these businesses have expense commitments which cannot all be settled by cash inflows from their sales income, therefore they need an overdraft facility to finance the deficit. ❖ A bank overdraft facility is quick and cheap to arrange as the
When a current account holder permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. The banker may take some collateral security or may grant such advance on the personal security of the borrower. The customer is permitted to withdraw the amount as and when he needs it and to repay it by means of deposit in his account as and when it is feasible for him. Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilization.
Generally an overdraft facility is given by a bank on the basis of a written application and a promissory note signed by the customer. In such cases an express contract comes into existence. In some cases, in the absence of an express contract to grant overdraft, such an agreement can be inferred from the course of business.
Cash withdrawals from a bank account already overdrawn will automatically increase the size of the overdraft. An overdraft facility does not have a repayment timetable like most term loans; therefore a business that uses an overdraft facility pays interest only for the period the bank balance is overdrawn or is in negative territory. Interest on a bank overdraft is highly volatile and is paid or accrued daily.
Bank overdrafts are acquired to cover temporary short term shortage of cash resources. A bank overdraft may be acquired for example; to finance on going working capital requirements or to support a start up business when it is still trying to find its feet.
Advantages of an Overdraft
An overdraft facility is a very useful form of funding particularly to small to medium businesses and to business start ups because these usually struggle for cash. In most cases these businesses have expense commitments which cannot all be settled by cash inflows from their sales income, therefore they need an overdraft facility to finance the deficit. ❖ A bank overdraft facility is quick and cheap to arrange as the