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)
- ODF – Maximum tenor of 12 months
- TODF – Maximum tenor of 30 days
- Overdrawn current account by the obligor is permitted but not exceeding the approved limit
- Maximum tenor of 12 months
- The bank earns interest income at the agreed interest rate on average daily debit balances
- The bank secures its position with adequate collateral
- In-built mechanism to achieve occasional swings
- Availed to only customers that operate and achieve the required transaction volume i.e., turnover or activity
- Overdraft facilities are repayable on demand
- Requires rigorous analysis of the borrower’s cash conversion cycle and financial statements
- Facility Request Letter
- Minimum of 6 months turnover analysis in Wema Bank or other bank(s)
- Account swing analysis for 6 months
- Maximum availment of 70% f execution cost (subject to exceptions)
- Turnover covenant (minimum of 100% of facility amount per month)
- Provision of tangible security (where applicable).
- Confirmation of LPO for genuineness
- Pro-forma Invoice for goods to be supplied
- Confirmation of Irrevocable Domiciliation of proceeds from LPO issuer
- Customer’s contribution (30% minimum of cost of execution)
- Counterparty information (LPO issuer)
- Profitability Analysis
- Terms of payment
- Track record