What is Bank Overdraft?
A bank overdraft is a short-term credit facility that allows a business to withdraw funds from its current account in excess of the available balance, up to a pre-agreed limit. It is recorded as a current liability and bears interest on the amount actually drawn.
How It Works
- The bank approves an overdraft limit based on the business’s creditworthiness and turnover.
- The company draws funds whenever its account goes negative, up to the limit.
- Interest is charged daily on the overdrawn amount and posted as finance cost.
- The balance fluctuates as the company deposits and withdraws funds, and the bank may review or revoke the facility periodically.
Saudi Context
Saudi banks supervised by SAMA offer overdraft facilities to SMEs and corporates under sharia-compliant structures such as Murabaha or Tawarruq, since conventional interest-based overdrafts are limited. The facility is disclosed under short-term borrowings in the IFRS balance sheet.
Example
A Riyadh SME has a SAR 200,000 overdraft limit. Its account dips to negative SAR 150,000 to pay suppliers. The bank charges a profit margin equivalent to about SAR 1,250 for the month, which the company posts as finance cost.