Overdrafts, term loans and revolving credit facilities

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Overdrafts, term loans and revolving credit facilities
  • Overdrafts
  • Term loans
  • Revolving credit facilities

Overdrafts, term loans and revolving credit facilities

This Practice Note explains the features of three common types of loan facility:

  1. overdrafts

  2. term loans, and

  3. revolving credit facilities (RCFs)

It also considers the advantages and disadvantages of each type of loan facility from a borrower's perspective.


An overdraft is the most common form of bank lending and is used to help solve short-term, day-to-day cash flow issues. As such, an overdraft facility is sometimes referred to as a 'working capital facility'.

An overdraft is a loan—it enables the borrower to borrow on a designated account up to a specified amount.

An overdraft can be 'planned' or 'authorised' (ie expressly agreed) or 'unplanned' or 'unauthorised' (ie arise from an implied request for an overdraft arising from the borrower giving a payment instruction that would take it beyond its agreed overdraft limit (if any)). The lender does not have to let the borrower become overdrawn.

The key features of an overdraft are that it:

  1. is generally uncommitted ie it can be withdrawn by the lender at any time

  2. is repayable on demand ie the lender can require that it is repaid immediately, even if the borrower has not defaulted in any way, and

  3. has interest payable on the amount overdrawn—interest is calculated at the close of each business day and is based on the closing balance of the designated account

The lender

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