Study Notes
Sources of Finance: Bank Overdraft
- Level:
- AS, A-Level
- Board:
- AQA, Edexcel, OCR, IB
Last updated 8 Aug 2019
A bank overdraft is a common external and short-term source of finance for a business.

Comparison of Bank Overdrafts and Bank Loans
The key advantages of overdrafts and loans in certain business situations:
Advantages of an overdraft over a loan
- Business only pays interest when overdrawn
- Bank has flexibility to review and adjust the level of the overdraft facility, perhaps on a short-term basis
- Overdraft can be effectively be used as a medium-term loan – the facility is simply renewed each time the bank comes to review it
- Being part of short-term debt, the overdraft balance is not normally included in calculations of the business' financial gearing
Advantages of a loan over an overdraft
- Business and bank know precisely what the repayments of the loan will be and how much interest is payable and when. This makes cash flow planning more predictable
- The loan is committed – the business does not have to worry about the loan being withdrawn whilst it complies with the terms of the loan
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