When running a business enterprise, you never know how and when you may require additional funds. Therefore, you may consider availing the overdraft facility, which can help you access temporary funding. Keep reading to know more.
A business or a self-employed individual may have regular short-term funding needs for various reasons. Moreover, the fund should be available regularly, so you don’t have to spend time on loan approvals when faced with temporary cash shortages or other financial emergencies.
Therefore, an overdraft facility can be an ideal solution for businesses. Let’s delve deeper into the overdraft facility and its benefits.
Understanding Overdraft Facility
An overdraft facility is a type of credit offered by various financial institutions where borrowers can get a credit limit sanctioned to their name but only pay interest on the final amount they use. This could be for personal or business use.
A business overdraft facility lets you withdraw money from the tied bank account even if the fund balance is insufficient or nil.
The negative balance can be repaid within the pre-determined stipulated period. So, it is an extension of the monetary limit offered by a financial institution to some of its customers.
The corporate overdraft limit offered by a financial institution depends on various factors such as customer relationship, average fund balance, the credit history of the individual or the corporate house, etc. It is also called a business overdraft loan, as the lender charges an interest rate on the overdrawn amount.
Types of Business Overdraft Loan
An overdraft business loan can be secured or unsecured. You can avail of a secured overdraft loan for business against property, fixed deposit, or equities.
A lender can offer a secured overdraft business loan at minimal interest rates as the borrower provides assets or a property as collateral. Therefore, a business owner might prefer it over an unsecured overdraft loan with relatively higher interest rates.
Benefits of Commercial Overdraft Facility
A business overdraft facility can be invaluable for businesses or self-employed professionals because of its multiple benefits.
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Maintains Liquidity
A business often requires urgent funds to support its operations, capital expenses, salary payments, etc. Moreover, there are times when a corporate house is awaiting a big payment for its services, but it needs the funds before the payment date. In these circumstances, it can use the corporate overdraft facility to meet the fund requirements and repay the overdraft balance on the availability of funds.
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Minimises Risk of Payment Delays
The shortage of balance in your operational fund may lead to the bouncing of cheques, delays in supplier payment, etc., which can ultimately lead to unnecessary disruptions in day-to-day business activities. Moreover, these incidents can also affect a corporate house’s image.
But a commercial overdraft facility can help your business maintain the payment obligations regardless of the actual fund in your account.
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Maintains Cash Reserves
A business should always have cash reserves that it can utilise in a crisis. However, some capital-intensive or small-scale businesses may face temporary issues related to cash reserves. The overdraft business loan can provide a permanent line of credit to these businesses in crises or in times of low business turnovers.
Simply put, a business overdraft facility can provide a low-cost financial cushion for your business.
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Provides Flexibility
An overdraft loan for a business can provide a lot of flexibility in terms of overdraft limit, repayment, and renewal. The lender can also increase the business overdraft loan limit for a business based on its turnover and past repayment behaviour.
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Interest is Charged as per Overdraft Usage
One of the great benefits of an overdraft loan for business is how interest is charged compared to other bank loans. The lender charges the interest only on the business overdraft amount till its repayment rather than the full overdraft limit.
For example, consider you have a sanctioned overdraft limit of ₹10 Lakhs, but you have utilised only ₹30,000. So, you will be charged interest on just ₹30,000, not the total overdraft limit of ₹10 Lakhs.
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Minimum Documentation
You don’t have to apply for a short-term loan repeatedly if the lender provides you with a business overdraft facility. You can simply use the facility like a revolving credit similar to a credit card.
The overdraft facility can help you run business operations smoothly and hassle-free. However, it’s important to choose the right lending partner. With lenders like Tata Capital offering customised services and competitive interest rates, making the right choice shouldn’t be difficult.
So, establish a business overdraft facility with your preferred lender and put your entire focus on growing your business.
