3. Bank Overdraft

Concept

Bank Overdraft is a financial instrument in which the money can still be withdrawn from the current or savings account, even if the account balance goes below zero. It is an extension of monetary limit offered by banks and that money is said to be ‘overdrawn’. An authorized overdraft limit is assigned to the customer depending on their relationship with the bank. The customer can withdraw money up till the assigned limit. The banks charge interest at a specified interest rate on the money withdrawn in the form of overdraft.

Advantages

• Helps in managing cash flow of business
• Fulfils urgent cash
• Interest is paid only on utilized amount
• Short-term borrowing
• Less paperwork
• No collateral required by banks
• Flexible use of cash in small portions
 

Disadvantages



• Higher interest rate
• Offered only to bank account holders
• Sanctioned limit depends upon applicant’s financials
• Not suitable for long-term finance
  

Difference between Bank Overdraft and Loans