Overdraft: GCSE Business Definition

Lisa Eades

Written by: Lisa Eades

Reviewed by: Charlotte

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Last updated

What is an overdraft?

In GCSE Business, an overdraft is a short-term source of finance that allows a business to spend more money than it has in its bank account, up to an agreed limit. It's a form of temporary borrowing that is activated when the bank account balance falls below zero.

Overdrafts incur fees and interest charges that the customer must pay back, similar to a loan. However, overdrafts are more flexible because businesses only pay interest on the amount they use and for the time they use it. Banks usually check the business’s financial history before offering an arranged overdraft and will set a limit on how much it can borrow.

Businesses often use overdrafts to manage their cash flow, especially when they need to pay suppliers before receiving payment from customers. For instance, a shop might use its overdraft to buy new stock before it has sold its existing items. While overdrafts are useful for short-term borrowing, they can become expensive if used regularly or for long time periods.

Overdraft Resources to Ace Your Exams

Save My Exams has a great range of resources to explore the topic of sources of finance, including overdrafts, further. 

Read our GCSE Business revision notes on sources of finance, including overdrafts, or test your knowledge of overdrafts with our exam questions to improve your grades. 

Explore GCSE Business Revision Resources

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Charlotte

Author: Charlotte

Expertise: Business Content Creator

Charlotte joined Save My Exams in 2024 with over 30 years of teaching experience in Business and Economics. A former Head of Business and Economics, she has inspired thousands of students across diverse settings in Lancashire. Known for her engaging approach, Charlotte also organized educational trips to destinations like New York and Shanghai, expanding students' global perspectives. She is currently an Edexcel A-Level Economics examiner, with over 20 years of experience in exam boards. Charlotte holds a BA (Hons) in Economics and Public Policy from Leeds Metropolitan University and a PGCE from Manchester University. In her spare time, she enjoys walking her Labradors and watching football.

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