Overdrafts, term loans and revolving credit facilities


Published by a ³ÉÈËÓ°Òô Banking & Finance expert
Practice notes
In-house

Overdrafts, term loans and revolving credit facilities


Published by a ³ÉÈËÓ°Òô Banking & Finance expert

Practice notes
In-house
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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.

Overdrafts

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

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Jurisdiction(s):
United Kingdom
Key definition:
Loans definition
What does Loans mean?

Occupational pension scheme resources may not at any time be invested in an employer-related loan. In accordance with section 40 of the Pensions Act 1995, employer-related loans are: loans to the employer or any such person; shares or other securities issued by the employer or by any person who is connected with, or an associate of, the employer; or employer-related investments eg a guarantee or security for obligations of the employer. This does not apply in respect of small self-administered schemes (SSASs) and self-invested pension plans (SIPPs).

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