Bank Overdraft is a facility provided by bank to its clients such as corporations and companies to withdraw funds from the business accounts in excess of the balance available in the account. There is always a fee associated with bank overdraft and interest is also charged on the amount being withdrawn from the account for a certain period of time. There are number of advantages and disadvantages of bank overdraft listed as under :-
Advantages of Bank Overdraft
One of the most important benefits of Bank Overdraft is that it provides facility to withdraw money from the account even if there is no balance in the respective account. This facility is helpful for the business where there is no definite schedule of cash inflows and outflows in a month and it allows managing the gaps of cash flow in and out of the company many times in a week or a month. The facility of bank overdraft helps in organizing the cash flows of a business. Another advantage associated with this concept is that you have to pay interest only on the amount which you have borrowed and it is a very flexible procedure.
Disadvantages of Bank Overdraft
One of the biggest disadvantages associated with bank overdraft is that there is a certain limit of the amount that you can borrow from bank and it also depends upon the creditworthiness and working capital of the company. There is a huge interest rate on availing this facility and these rates are flexible making them extremely difficult to forecast and budget them in an accurate manner. The interest rate associated with bank overdraft is usually higher than regular bank loans. The process may seem pocket friendly in the beginning however it is more expensive in the long run