What is an Overdraft?

 An overdraft is an extension of credit from a lending

institution that is granted when an account reaches
zero.
 The overdraft allows the account holder to continue
withdrawing money even when the account has no
funds in it or has insufficient funds to cover the
amount of the withdrawal.
 There is interest on the loan, and there is typically a
fee per overdraft.
 MORE ABOUT OVERDRAFTS

 Overdraft a better short-term option in an

emergency.
 The interest on the loan is lower than the interest on
credit cards.
 An authorized overdraft limit is assigned for each
customer depending on their relationship with the
bank.
 The customer can withdraw money up till the
assigned limit.
 ADVANTAGES

 HANDLES TIMING MISMATCH OF FLOW OF

FUNDS
 HELPS IN KEEPING GOOD TRACK RECORD
 TIMELY PAYMENTS
 LESS PAPERWORK
 FLEXIBILITY
 BENEFIT OF LESS INTEREST COST
 DISADVANTAGS

 HIGHER INTEREST RATES

 RISK OF REDUCTION IN LIMIT
 RISK OF SEIZING
 DEBTOR’S COLLECTION BECOMES LETHARGIC
 TAKEAWAYS

 Overdraft is a temporary facility obtained by the companies to

meet their ultra-short term cash shortage/requirement.
 This facility comes with a high cost and should be used as a
stop-gap management of funds or as an emergency activity
rather than a routine funding activity.
 Higher dependence on overdraft for working capital financing
indicates poor working capital management and a liquidity
constraint faced by the company.
 Only temporary working capital should be financed by bank
overdraft.
 The permanent working capital should be financed by long-
term financing.