Source Of Short Term Finance: Bank Overdraft

Features & Salient Points

• Simplest and most flexible type of short term finance for most business;
• Given a maximum limit;
• Interest is charged only on those utilized;
• Unutilized amount is charged a small % of commitment fee;
• This facility is given on top of what the owner has in his/her current account;
• Generally about 2%-5% above the lender bank’s base lending rate. Premium spread like 0.25% to 0.75% are given by the lender bank to their high valued customers

Advantages

• Flexible because the borrower can reduce his overdraft as and when he wants by merely banking into his current account which has the overdrawn amount;

Disadvantages

• Is repayable on demand and normally the borrower need to provide security/collateral for the overdraft facility.

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