We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Overdraft Facility?

Mary McMahon
By
Updated: May 16, 2024
Views: 69,694
Share

An overdraft facility is a formal arrangement with a bank that allows an account holder to draw on funds in excess of the amount on deposit. This type of financing is most commonly used by businesses as a way of making their working capital more flexible, although it can also be available to individuals. Banks that offer this service typically have a number of expectations from customers who use it, and it is important for customers to be aware of these expectations before entering an agreement.

The idea behind overdraft facility agreements is that sometimes one needs a bit more money than is available on deposit to deal with various expenses. For example, a business that is always slow in March and April might need help to make payroll and keep current with all accounts and creditors. Another business might need to make a big one-time expense that exceeds the funds on deposit.

With an overdraft agreement, the company can repay the funds at its convenience. The bank may charge an overdraft fee for accessing the money, however, and the interest rate can be higher than that for other types of loans. The bank also has the right to demand repayment in full. Balancing an overdraft facility wisely can free up capital and make people more stable financially, but unwise use can lead people into a spiral of debt that may be difficult to escape.

The amount available to the company or individual is also limited; people are not allowed to continually take money out and not repay it. The amount of the overdraft is usually pegged to account history and financial information, with the goal of ensuring that people do not end up borrowing more than they can realistically repay. The agreed limit can be negotiated with the bank, and some financial institutions are willing to reevaluate that amount if customers feel that their circumstances have changed.

Overdraft facilities provide flexibility and a bit of a buffer that can be used to ride through a period of hard times. Other lending instruments may be more practical, however, and it is a good idea for customers to talk about options for accessing lines of credit and loans with a bank staffer or financial adviser before making any firm choices. It is important to avoid making a financial choice that would be problematic later in the hurry to access funds to deal with a current problem.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By elizabeth23 — On Feb 26, 2011

My first year of college, I had huge trouble with my bank and its form of overdraft facility. I use online banking, and the information on the website had not been clear enough about how much money I had, so I ended up overdrafting several times- in the end, they were charging me 30 dollars each for overdrafts of less than ten dollars. I ended up several hundred short, and it was more the bank's fault than the fault of anyone else. I switched banks and became paranoid about my account's bottom line- I haven't overdrawn money since, but if I did, I'm not sure if I would trust this new bank to treat me fairly any more tan the last did.

By stolaf23 — On Feb 24, 2011

When you choose a new bank, make sure you understand what they mean in their overdraft policies. A lot of banks throw around terms like "overdraft security" and "overdraft protection", but it means very little when you actually end up overdrafting your account. Furthermore, these services often have high fees, so unless you are really worried about taking out too much money, it might be cheaper to risk the occasional overdraft, depending on the bank's fee.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
Share
https://www.smartcapitalmind.com/what-is-an-overdraft-facility.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.