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Overdraft Facility (OD):

A credit agreement made with a financial institution that permits an account holder to use or withdraw more than they have in their account, without exceeding a specified maximum negative balance. Establishing an overdraft facility with a bank can help an individual or small business with short term cash flow problems, although the negative balance typically needs to be repaid within a month.


Sometimes a contingency fund won't be enough to take care of a financial emergency. Though most people keep three to six months' expenses aside as per their financial adviser's recommendation, they sometimes need to raise money for a short period to meet an emergency. It's quick to get approval from banks and cheaper compared to other loan offers.

Many of them turn to their banks for an overdraft against their assets to raise short-term funds. "Overdraft is a good instrument to raise funds for a short term and if used wisely, it can help you tackle your short-term financing needs smartly,"

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.

 
     
 
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