An overdraft facility is a credit agreement made with a bank that allows an account holder to use or withdraw more money than what they have in their account up to the approved limit. The line of credit is typically given based on account holder balances, and as pre-sanctioned loans against assets such as bank FDs, shares and bonds offered as collateral. The sanctioned overdraft limit and the interest charged will vary based on the nature of the asset offered as collateral.
The overdraft facility works like an approved loan. Money can be withdrawn as and when required and the interest has to be paid only on the amount borrowed and only for the time it was borrowed. Establishing an overdraft facility with a bank can help individuals or small businesses with short term cash flow issues, although the negative balance needs to be repaid within a month.