If you are a business owner, you may have occasionally run into situations where your account balance has dipped and interrupted your operations. In such circumstances, it can become challenging to arrange for funds to ensure that your business continues to run smoothly. It is to counter such difficulties that you can rely on Overdraft Facility. This article explains everything you need to know about Overdraft Facility, from bank overdraft meaning and features, to its importance for business.
What is Overdraft Facility?
Overdraft Facility is a credit-based facility offered by various banks and financial institutions. With overdraft, you can withdraw money from your Current or Savings Account even if the account balance has bottomed out and gone below zero. It is an extension of the monetary limit offered by banks, and the money so withdrawn is said to be ‘overdrawn’.
The amount of funds you can avail of via Overdraft Facility depends on your customer relationship with the concerned bank. With an Overdraft Facility, you can withdraw money as per this authorised limit. In exchange for the funds offered, banks do levy interest rates. However, interest rates are only applicable to the amount utilised from the total sanctioned limit.
Basically, Overdraft Facility functions as a short-term loan that has to be repaid over a fixed tenure along with pre-decided interest.
Features of an Overdraft Facility
Let’s look at some of the features of Overdraft Facility offered by banks.
Approved credit limit: Overdraft is extended to customers as per a predetermined limit which can vary from one customer to another.
Interest rate: The interest rate is calculated on a daily basis and is billed to the account when the month ends. If you default on repaying the overdraft as decided, the interest is added to the principal at month-end. From then on, interest is calculated on this new principal amount.
Zero repayment charges: While you do have to pay a prepayment charge while repaying any loan, this is not the case with Overdraft Facility. Along with the zero repayment charge, you can repay the overdraft amount in a lump sum manner without relying on EMIs.
No EMI-based repayment: With an Overdraft Facility, you can repay the borrowed money whenever you have funds. You do not have to repay via EMIs and can pay off any amount you like. However, if the lender demands a repayment, you will have to meet their requirements.
Minimum monthly payment: Again, there is no minimum monthly payment associated with overdraft. However, the amount you borrow must fall within your sanctioned limit. Also, try not to delay your overdraft repayment for long durations as it can negatively impact your credit score.
Joint borrowers: You can avail of an Overdraft Facility jointly with a co-applicant. However, both of you will be responsible for the entire debt and the timely repayment. If one borrower defaults during repayment, then the other borrower will have to shoulder the entire amount. Plus, all collaterals of each of the borrowers are equally at stake in case of default, regardless of their overdraft proportion.
How can Overdraft Facility help your business?
Today, there are various kinds of overdraft offered by banks and financial institutions. You can avail of overdraft against property, Fixed Deposits, Insurance Policy, equity, and salary. Plus, overdraft is extended to self-employed professionals, salaried individuals, and enterprises. Thus, you can avail of an Overdraft Facility for your business needs, as well. However, for your business, you can apply for all the previously mentioned kinds of overdraft except for a salaried overdraft.
Also Read: Cash Credit Vs Overdraft - Which Is Better For Your business?
When it comes to your business, you might sometimes find that your cash reserves are dipping low, and you require additional funds. To that end, an Overdraft Facility is a relatively easy-to-avail and flexible means of financial assistance. It provides you with a permanent line of credit that you can dip into as and when you need it. Plus, you only have to pay interest on the amount you are spending. As far as short-term borrowing is concerned, the cost of such interest payments could end up being lower than that of a loan.
Overdraft is especially useful if you are running a small business. It can be effectively used to manage ad hoc or sudden expenses. It also helps provide consistent cash flow, especially during periods when there is a dip in your business. Now that you know more about overdraft, you can consider one the next time your business is in a tight spot to keep your operations running smoothly. HDFC Bank offers Overdraft Facility for MSMEs with funding up to ₹10 lakh. Enjoy flexible EMIs that make repayment easy on the pocket. We also offer a range of other products, including Bank Guarantee, Letter of Credit, and credit line so that your MSME gets all the funding it needs. Click here to know more.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
Also read: What is an overdraft and how it can help your business