Define the term 'overdraft'.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [1] bank agrees to lend up to a set amount of money
2. [1] when an account reaches zero/as and when needed
3. [1] a short-term extension of credit
4. [1] a flexible borrowing facility
5. [1] source of finance/current liability/interest charged/no need for collateral
6. allows short-term funding for businesses to make payments to improve working capital, e.g. day-to-day expenses
7. use overdrafts to facilitate cash flow management, e.g. payment to suppliers
8. enables the handling of emergency cash flow events
9. more convenient to arrange/less paperwork
10. a business might use an overdraft facility as an alternative to factoring
11. may use an overdraft as an alternative to a loan – only borrow what is needed at a particular time
12. Accept any other valid response.
13. Do not accept 'start up' or 'growth/expansion' or 'capital/machinery' for the use of an overdraft.
14. [3] Sound explanation of two reasons for a business using an overdraft.
15. [2] Sound explanation of one reason or partial explanation of two reasons.
16. [1] Partial explanation of one reason or a list of two reasons.