FinTech Glossary

What Is an Overdraft?

An overdraft is a banking facility that allows an account holder to withdraw more money than the available balance, up to a sanctioned limit, effectively providing short-term credit.

How Overdraft Facilities Work

Banks approve an overdraft limit based on credit assessment. Interest is charged only on the amount used, not the full limit. Overdrafts may be secured or unsecured and are commonly linked to current accounts for businesses. In India, overdrafts are used to manage temporary cash flow gaps.

Why Overdrafts Matter

Overdrafts provide liquidity during short-term cash shortages, helping businesses meet urgent obligations. However, overuse can increase interest costs and signal weak cash flow discipline if not managed carefully.

Business Context

Finance teams use overdrafts as a contingency tool, not a primary funding source. Clear visibility into inflows and outflows helps reduce dependency on overdrafts and improves working capital planning.