METHODS OF FINANCE - Overdrafts (SHORT-TERM)

Overdrafts - An overdraft is the facility to overspend on a current account up to an agreed sum temporarily. This money is needed only when working capital is insufficient to pay debts and bills.

  1. The business in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red.
  2. Interest is charged on the overdrawn amount at a much higher rate compared to interest on a loan.
  3. Good short-term source of finance
  4. An external source of finance provided by the banks and building societies.
ADVANTAGES OF OVERDRAFTS
  • Only borrowed when required allowing flexibility
  • Only pay for the money borrowed
  • Quick and easy to arrange
  • No charges for paying off the overdraft
  • Not secured on assets of the business
DISADVANTAGES OF OVERDRAFTS
  • The bank can call it in at any time
  • Only available from a current bank account
  • Interest payments tend to be variable making it more difficult to budget
  • Banks may secure the overdraft against the business' assets

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