Overdrafts

• Overdrafts are short-term loans provided by banks, allowing businesses to withdraw more than they have deposited in their account up to a certain limit.
• Are overdrafts a short or long-term source of finance?

  Short-term source of finance
• Overdrafts are flexible and allow firms to overspend if and when needed
• Overdrafts are useful for firms who suffer seasonal fluctuations in sales or experience short-term cash-flow problems
• What are the main benefits of overdrafts?

  • Relatively easy to arrange
  • Flexible - use as cash flow requires
  • Only pay interest on the amount borrowed
• What are the main drawbacks of overdrafts?

  • Bank could ask to repay with short notice
  • Higher interest rate than a bank loan
  • Lower borrowing limits than a bank loan