Calculations

The key part of the overdraft facility is the manner in which the interest is calculated. This becomes a good facility as far as low cost funds are concerned because a smart business will ensure that it does not have a high cost in the usage of credit facilities. There are a few factors that lead to this position for the borrower.

The interest is charged on a daily basis, which means the borrower will be charged interest only for the time period for which the account is used for drawing an extra amount. In most cases where there is an existing current account the overdraft facility is added on to this so that the same account can be overdrawn till the limit. There is no fixed period for which the interest cost will be levied, and the earlier the amount is available for the business the faster will be the clearing off the balance outstanding in the account, which will lead to the reduction in the cost.

The rate of interest is fixed for the time period for which the facility is made available, and this rate is made known to the borrower beforehand. Borrowers can then ensure that the borrowing is made only for the time period that is affordable and for which there is a benefit in terms of a lower cost. This facility can also be used anytime, with no extra effort involved. It is just like using some amounts that are made available to the business when one requires it. There is also complete freedom in paying back the amount, so when the cash is present it can be used to pay off the outstanding and stop the interest charged.