Overdraft
Also called: OD, cash credit
What is Overdraft?
An overdraft is a facility allowing a business to draw beyond its current account balance up to an approved limit, with interest charged only on the amount actually used and only for the days it is used.
Why Overdraft matters
Overdrafts suit fluctuating needs — a festive stock buy, a delayed payment — far better than a term loan, because idle limits cost nothing beyond the facility fee.
Overdraft formula
Interest = Amount drawn × Rate × Days used ÷ 365
Charged only on utilisation, not on the sanctioned limit.
How Overdraft works in practice
Watch utilisation: a facility that never returns to zero has become a term loan at overdraft rates, which is an expensive way to fund a structural gap.
Frequently asked questions
Both are revolving facilities; cash credit is typically secured against stock and receivables with periodic statements.