Chapter 7 Trade financing techniques
especially in a weakening trading
environment. On the other hand, if there
is no overdraft facility, a subsidiary may
have to keep a larger precautionary cash
balance to cover uncertainty. An overdraft
‘just in case’ enables the subsidiary to
remit more cash to the centre.Evaluation
Overdrafts can be an important tool forcompanies managing their working capital.
They are particularly useful to manage
short-term peak cash requirements and to
provide liquidity in the event that anticipated
cash receipts do not materialise. Because
they can be withdrawn on demand, overdrafts
are less suitable as a more permanent source
of working capital finance. However, most
companies use overdrafts for at least some
portion of their financing.