What Is an Overdraft Facility?

An overdraft facility is a formal arrangement with a bank which allows an account holder to draw on funds in excess of the amount on deposit. Overdraft facility 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 which offer this service typically have a number of expectations from customers who use it, and it is important to be aware of these expectations before entering an overdraft facility 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 which is always slow in March and April might like to use its overdraft facility to make payroll and keep current with all accounts and creditors. Or, a business might need to make a big one-time expense which exceeds the funds on deposit.

With an overdraft facility, people can repay the funds at their convenience. The bank may charge an overdraft fee for accessing the overdraft facility, 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 which may be difficult to escape.

he amount of an overdraft facility is also curbed; 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 through an overdraft facility. The agreed limit can be negotiated with the bank, and some banks are willing to reevaluate if customers feel that their circumstances have changed.

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