An overdraft is basically the facility offered by a bank that allows the individuals to consistently withdraw money from their accounts even if there is no balance in the account. In other words, overdraft is an extension of credit to the individual from a bank or a lending institution during the times, an account reaches zero.
The procedure involved in overdraft is same as taking other loans. For overdraft, an individual needs to offer the bank some collaterals that include his/her house, bonds, fixed deposits, shares, and insurance policies. The best part about overdraft facility is that bank or lending institutions don’t take much time to sanction overdraft against fixed deposits. Another important point to note is that banks usually prefer surrender value of life insurance policies while offering the overdraft.
Banks offer the overdraft facility by charging a fee and interest on the surplus amount, withdrawn for the duration of time. As overdraft offers the number of advantages to the individuals, the bank overdrafts assist the businesses whose cash flows in an out several times in a month. Apart from this, overdrafts allow the businesses to manage cash flow gaps occurring due to a mismatch in time. Overdrafts facility also helps in maintaining a good payment history of the business.
As business overdrafts are usually offered at a specific cost, there are some costs that an individual needs to consider. Listed below are the 6 Direct Costs that an individual needs to consider if he/she is availing overdrafts facility.