This is a credit facility which allows the borrower to draw, within a specified tenor usually not exceeding 12 months, agreed amounts in excess of the credit balance in the current account with the bank
A credit facility usually provided to finance short-term shortages in cash/working capital needs typically not exceeding 12 months. It works by allowing the obligor draw funds over and beyond their credit balances but limited to a specified amount.
It is used to finance current assets or meet payments on expenses. An assessment of working capital needs is normally carried out.
Overdraft is susceptible to the same risk the business entity is subjected to i.e., inability to complete asset conversion cycle (ACC), business risk, industry risk, production, collection, macro-economic risk, demand, supply and diversion risks.
Overdraft Facility (ODF) vs. Temporary Overdraft Facility (TODF)