Short Term Financing-Bank Overdraft Facility

One of the credit facilities that businessmen can obtain from Financial Institutions is the Bank Overdraft Facility.

This article looks at its characteristics as this is the commonest tool used in company’s debt financing:

• Only granted by Commercial banks;
• Very convenient ( cheques can be issued for amounts within the agreed limit);
• Flexible in terms of the amount and time period required;
• Allow us to overdraw our current account of up to an amount agreed upon;
• Suitable for short-term commitments in financing the daily needs of the business;
• Interest is only charge on amount overdrawn and for the period of its use;
• Interest rate varies according to types of borrowers,nature of business,industry of the borrower,security offered,Bank Negara’s directives and the market trends.
• Interest rate is always pegged at Base Lending Rate (BLR) + spread
• The spread is the profit margin to be earned by the bank.

How this bank facility is granted can be based on any of the following criteria:

1. Clean basis – given due to the bank’s utmost trust and confidence of it clients’ integrity,financial performance,reputation,etc;
2. Personal guarantee – directors or any third party guarantees the facility in their personal capacities;
3. Collaterals given as securities like properties,shares,fixed deposits
4. Assignment over the expected contract monies –normally where the principal agree to make payment directly to the contractor’s banker;
5. Purchase/discounting of trade bills- here the bank gives immediate credit before the proceeds of the bills are collected and received. The bills can be drawn at sight or usance.

The main disadvantages are this type of facility is repayable on demand and normally the borrower need to provide security/collateral for the overdraft facility

• Short Term Financing:Inventory Financing (Part 2)
• Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
• Current Assets As Collaterals For Short Term Financing (Part 1)
• Finance:Bankers’ Acceptance Facility(B/A)
• Finance:Trust Receipt Facility
• Note Issuance Facility (NIF)
• Short Term Finance:Taking Cash Discount From Supplier