An overdraft facility is an agreement with a bank allowing a business to draw its account balance below zero, up to an approved limit, to cover short-term cash shortfalls.
What it means
It's a flexible, short-term borrowing tool - interest is usually charged only on the amount overdrawn and only for the time it's overdrawn, unlike a term loan where the full amount accrues interest from disbursement.
Where it fits in
Businesses commonly draw on an overdraft to smooth timing gaps in working capital, for example covering a payroll run before customer payments come in, making it a routine part of short-term cash flow management.
Key rules
- A pre-arranged line of credit against a bank account, up to an agreed limit.
- Interest charged only on the amount and duration overdrawn.
- Used to smooth short-term working capital and cash flow gaps.
- Distinct from a term loan, which disburses a fixed amount upfront.
