What is an overdraft and how it can help your business

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, arranging funds to ensure that your business continues to run smoothly can become challenging. 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.

An overdraft Facility is a credit-based facility offered by various banks and financial institutions. 

With an 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 It is an extension of the monetary limit banks offer, and the money withdrawn is said to be ‘overdrawn’.

The amount of funds you can avail of via the Overdraft Facility depends on your customer relationship with the concerned bank. With an Overdraft Facility, you can withdraw money per this authorised limit. In exchange for the funds offered, banks levy interest rates. However, interest rates only apply to the amount utilised from the total sanctioned limit.

Overdraft Facility functions as a short-term loan that must be repaid over a fixed tenure and pre-decided interest.

Let’s look at some features and benefits of the 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 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 must meet their requirements.
  
  
• Minimum monthly payment: Again, no minimum monthly payment is associated with an 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 use an Overdraft Facility jointly with a co-applicant. However, you will be responsible for the entire debt and the timely repayment. If one borrower defaults during repayment, the other borrower must shoulder the entire amount. Plus, all collaterals of each borrower are equally at stake in case of default, regardless of their overdraft proportion.

Variety of Options

Today, banks and financial institutions offer various overdraft types. You can secure overdrafts against property, Fixed Deposits, Insurance Policies, equity, and salary. For businesses, options include property, Fixed Deposits, insurance, and equity overdrafts.

Ease of Access

An Overdraft Facility provides a permanent line of credit, accessible as needed. You only pay interest on the amount used, which can be lower than loan interest for short-term borrowing.

Flexible Usage

Ideal for managing sudden or unexpected expenses, overdrafts ensure consistent cash flow. They are particularly useful during business downturns or cash flow shortages.

For small businesses, overdrafts help manage unforeseen costs and maintain steady operations. HDFC Bank offers overdrafts up to ₹10 lakh for MSMEs, with flexible EMIs to ease repayment. Not only that, HDFC Bank provides various financial products like Bank Guarantee, Letters of Credit, and credit lines, ensuring comprehensive funding solutions for MSMEs. 

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*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.