Overdraft – The negative amount of money in a current account
To remember what overdraft means use the following mnemonic:
He went into debt over draught (overdraft) beer. He drank so much that his current account balance became less than zero.
An example sentence using the word overdraft would be: “Today our company has a £3000 overdraft”
This means that the company’s current account is negative £3000 in debt to the bank. It could be thought of as an extra loan of £3000 from the bank.
It helps to understand that this is normal practice because a current account is a bank account which allows you to withdraw money without asking permission up to an agreed overdrawn limit. This overdrawn limit is called an overdraft facility.
An overdraft is flexible, you only borrow what you need at the time which makes it cheaper than a loan. Many companies would prefer to have a large overdraft facility as it is a quick way to purchase machines or buy technology at short notice.
A business will get next to no interest money if they have a positive amount in their account. Many companies will pay off larger amounts each month on their mortgage loans and have their current account remain permanently in a negative figure between zero and their maximum overdraft. This minimises the amount of interest they would pay in total to a bank.