What an overdraft facility really costs — and when it’s the wrong tool

An overdraft facility is fast to use and flexible — which is exactly why it’s easy to overrate. It bridges short gaps well, but turns expensive and risky the moment it becomes a permanent substitute for equity you don’t have.

This guide explains what a drawn overdraft is, legally and practically, how its cost differs from a term loan’s, with a worked example — and when it’s the right tool and when it isn’t.

What an overdraft facility is

The German term Kontokorrent (“running account”) comes from commercial law: under Section 355(1) HGB (the German Commercial Code), mutual claims and services between two business partners — interest included — are continuously invoiced and periodically settled by netting and establishing the surplus. The statute governs only that netting arrangement on the business account; it says nothing about the credit itself and nothing about any interest rate.

In everyday use, drawn overdraft (Kontokorrentkredit) means the actual amount used from the overdraft facility (Kontokorrentlinie) — the negative balance that genuinely exists on a given day, within the ceiling the bank has agreed. How you negotiate or raise that facility in the first place is covered in negotiating a credit line increase; this guide focuses on what using it costs and when it’s the right call.

How a drawn overdraft works

Unlike a term loan with a fixed disbursement amount and a fixed repayment schedule — see calculating a business loan — a bank doesn’t hand over a fixed sum that then gets repaid. Under Section 488(1) BGB (the German Civil Code), a lender generally undertakes to make a sum of money available, for which the borrower owes interest and repayment at maturity; with an overdraft facility, this works as a revolving arrangement instead: you can draw on the facility and pay it back as often as you like within the agreed ceiling, with no fixed repayment date attached.

The business account swings between a positive and a negative balance accordingly, depending on when payments come in and go out. Every incoming payment automatically reduces the amount drawn; every outgoing payment that exceeds the available balance increases it — up to the limit of the agreed facility.

What a drawn overdraft really costs

The key difference from a term loan: you’re charged interest only on the portion of the facility you actually draw — not on the full agreed ceiling. Don’t use the facility on a given day, and no interest accrues; use half of it, and you pay on that half only. That sets it fundamentally apart from a term loan, where the full amount accrues interest from disbursement, whether or not you need the money right away.

That flexibility has a price: the rate on an overdraft facility tends to run higher than on a secured term loan with a fixed repayment schedule, because the bank has to plan around fluctuating utilisation at any time and hold liquidity ready for it. Banks don’t publish a standard figure for this — as with any financing, the rate is negotiated individually and depends on creditworthiness, collateral and the relationship with your bank.

There’s a costlier flip side too: exceed the agreed facility, and the bank typically charges a separate, even higher rate on the excess — again with no statutory or standard level. Slip into that territory regularly, and you pay considerably more for the exact same cash need than a facility increase negotiated in time would have cost.

Worked example: drawing part of the facility, not all of it

A worked example using generic illustrative figures (not real rates), showing the core difference from a term loan: a €100,000 overdraft facility with an assumed rate of 8% p.a. on the amount actually drawn.

In the example, week 1 generates no interest at all because the facility goes unused; by week 3, interest rises because the amount drawn has grown to €90,000. With a term loan for the same amount, the full €100,000 would have accrued interest from day one — regardless of whether and when the money was actually needed. That’s exactly why a drawn overdraft is cheaper than a term loan for the full sum when the need is short and variable — and more expensive when utilisation stays permanently high, because the higher rate then runs continuously on a large balance.

When a drawn overdraft is the right tool

Its real purpose is to bridge a gap: the gap between the payment terms you grant your customers and those your suppliers grant you, plus seasonal swings in day-to-day operations. Good-fit cases include a short-term need to pre-finance inventory or payroll, a single late customer payment, or deliberately drawing the facility to capture an early payment discount when its effective annual rate beats the facility’s own rate.

In every one of these cases the same principle holds: the draw is temporary, and the balance heads back toward zero within a predictable period. A 13-week cash flow forecast lets you confirm that in advance, rather than discovering it on the bank statement after the fact.

When a drawn overdraft is the wrong tool

Trouble starts when the facility stays drawn close to its ceiling permanently instead of covering short peaks. That’s almost always a symptom, not a cause — usually too little equity, payment terms that run too long, or a structurally negative margin. A higher limit only buys time in that case; it doesn’t close the underlying gap, as the guide to cash flow shortages also shows.

For three common situations, there’s a genuinely cheaper tool:

• A planned, long-term financing need — an investment with a known amount and a predictable useful life: a term loan with a fixed repayment schedule is usually cheaper here, see calculating a business loan, because its rate runs lower and stays predictable.
• Cash tied up in open receivables: rather than pre-financing your own receivables through the facility, invoice factoring converts them straight into cash, without adding to the overdraft balance at all. Whether recourse or non-recourse factoring is the better fit depends on the credit risk of the debtors involved.
• A structurally negative margin or too little equity: no financing instrument fixes this; it needs a change to the business model or fresh equity, not more debt.

On top of that comes cancellation risk: if the borrower’s financial position, or the value of collateral provided, deteriorates materially, the bank can terminate the loan agreement under Section 490(1) BGB — before disbursement, in case of doubt, always; after disbursement, as a rule, without notice — and that applies to a continuously drawn facility too. Run a permanently maxed-out facility as your only reserve, and a cancellation like that leaves you with no buffer at all. Above a certain volume, Section 18(1) sentence 1 KWG (the German Banking Act) requires the bank to obtain your financial statements regardless, once a loan exceeds €1,500,000 or 10 percent of the bank’s core capital in total — one more reason to know your own debt service capacity before the bank asks.

Frequently asked questions

The most important questions on the cost and use of a drawn overdraft are gathered at the end of this page.

Frequently asked questions