An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn on at any time and is most useful for day-to-day expenses. This is because it can help you to manage your cashflow more flexibly.

Overdrafts are most useful as a cashflow-management device, to help absorb unexpected expense or hitches in your supply chain. It is worth noting that loans are probably more appropriate for long-term funding or substantial purchases. An overdraft is likely to cost more than a loan for a long-term purchase.

An overdraft is a credit facility you agree with your bank. It allows you to temporarily spend more than you have in your account to cover short-term financing needs.

It should not be used as a long-term source of finance – if an overdraft is used persistently your bank may question whether you are in financial difficulty.

You’ll need to agree your overdraft limit with your bank. You’ll usually be charged interest on any money you use, and may also have to pay a fee.

Advantages:

  • It’s flexible – you only borrow what you need at the time, making it cheaper than a loan
  • It’s quick to arrange
  • You normally won’t be charged for paying off your overdraft earlier than expected

Disadvantages:

  • There will usually be a charge if you want to extend your overdraft
  • You could be charged if you go over your overdraft limit
  • The bank can ask for the money back at any time
  • You can only get an overdraft from the bank where you hold your business current account