Overdraft
Arrangement allowing account to go negative to agreed limit.
Formula
Overdraft Cost = Amount Overdrawn × Daily Interest Rate × Number of Days
Real World
A small independent café chain like Grind Coffee might use a £20,000 overdraft facility in January when sales are slow, paying interest only on the days the account is in deficit.
Exam Focus
When evaluating overdrafts, always weigh flexibility against cost and the risk that the bank can demand immediate repayment.
How well did you know this?