This is the permission granted the bank to its customers to write cheques even though customers have insufficient funds in their accounts. Normally a bank puts a limit for the facility, but so long as the limit has not been exhausted the customer has a right to use the facility.
- It can be raised very fast and can therefore be used to build the company out of short term liquidity problems.
- It is usually not secured.
- It is provided without conditions
- It doesn’t involve any floatation costs.
- Its costs and financial constraints are short lived.
- It does not increase the firms gearing.
- It can be applied without the consent of shareholders. It can therefore be used to meet the company’s immediate financial needs.
- It is very expensive. Interest on overdraft is higher than interest on long term loan.
- Its constant use is a sign of poor financial management.
- It is not accessible to all firms.
- It can only be raised financially sound firms which are well known to the lender.
- It is open to misuse because it can be used without shareholders consent.
- It is available in small quantities and cannot therefore be invested in long term project which are more profitable.
- It can be recalled at any time or on short notices. This may leave the company in financial constraints.