Meaning of Bankoverdraft
It is an agreement negotiated with the bank has an individual lender and it may be on short term. The owner of the account is allowed to withdraw form his bank account to his negative account.Overdraft is the commonly used source of short term finance. The loan will include the rate of interest to be charged and the amount of overdraft and length of time for which it would be paid.
The most important of bank overdraft is that it enables bank account to draw.
The agreement is that the borrower agrees to repay the loan and in addition with interest when viewed.
This type of short term finance is used to increase the level of inventory of business and they are referred to as seasonal loan, For most company and individual, bank remain the main source of external finance and overdraft is a permit to overdraw in an account up to a stated limit
Advantages of overdraft
1. Simplicity
It can be negotiated and operated simply, no new account is to be opened before the loan is given
2. Flexibility
The borrowing firm has the flexibility to borrow up to a stated limit. Only the amount actually needed are borrowed and the interest is charged to the account every 3 month and it is calculated on a daily basis usually 1% to 5% above the bank base rate according to the degree of risk involved.
3. Interest charged on overdraft is an allowable expenses for tax purpose for the business use but not for personal use. It is treated just like normal expenses in the trading profit and loss account
Disadvantages of overdraft
1. The major draw to an overdraft is that the bank has the right to withdraw the facility at short term notice. It could be a problematic to use overdraft for a project which will take 3 or more years for execution.
Collateral security
2. Another major consideration for the borrower is the issue of security. Bank usually take a personal guarantee of the director or owner of business
0 comments:
Post a Comment