Plain definition
An overdraft is bank borrowing that lets an account balance fall below zero up to an agreed limit. It can cover a short mismatch between payments and receipts, but its availability, price, and repayment demand depend on the banking agreement. Some overdrafts can be repayable on demand, which means a bank may require repayment even though the company planned to use the balance longer.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A service company has in its account and must pay in payroll two days before it expects from customers. It uses of a overdraft. When the customer cash arrives, the account moves from overdrawn to positive. The facility bridged timing, but it did not create a surplus for new spending.
| Overdraft balance after payroll | |
|---|---|
| Customer cash received | |
| Positive account balance |
An overdraft may be appropriate for a short, visible timing gap; repeated dependence can indicate a cash deficit rather than timing.
Why it matters
The bank balance alone can mislead a founder because an overdraft makes payments possible after cash has run out. If management treats the limit as ordinary cash, it can spend the buffer needed for payroll or absorb interest and lender action without fixing delayed collections.
Practical consequence
Monitor the daily balance, limit, drawn amount, charges, review date, and any demand-repayment right. Link overdraft use to identified receipts, not hopeful sales. Escalate when the balance does not return as planned, and then reduce discretionary payments, collect overdue invoices, or arrange suitable funding rather than rolling the deficit indefinitely.