Current Account with Overdraft Facility - Meaning, Interest Rates & Uses

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08 FEBRUARY, 2024

As a business owner, it is crucial to have instant access to short-term credit on good terms. This allows you to mitigate business risks and handle unforeseen expenses while taking advantage of time-sensitive business opportunities. And when you have a Current Account that is designed to meet all your business and banking needs, you can make use of the overdraft facility.

What is an Overdraft Facility in a Current Account?

An Overdraft Facility in a current account provides a crucial financial buffer when faced with cash flow challenges. Imagine making a critical purchase, but your account balance needs to be higher. With an overdraft, you can bridge the gap, allowing transactions beyond your available balance.

For example, if you have Rs. 50,000 in your current account but need to make a Rs. 70,000 purchase, the overdraft covers the Rs. 20,000 shortfall. This financial tool in a current account with overdraft facility, ensures uninterrupted operations by granting the flexibility to access additional funds when needed.

How Does The Overdraft Facility Work on Current Account?

Depending on the type of Current Account you have, your usage and requirements, your credit score, and your repayment history, there will be a certain limit up to which you can overdraw.

One of the best parts about the overdraft facility for current account is that the interest will be charged only on the amount you utilise and not the entire specified limit. The interest will also be charged only when you use the additional funds.

Another helpful feature of this facility is that you do not have to pay back the amount in Equated Monthly Instalments (EMIs) like in other loans if you don’t want to. Instead, you can repay the overdrawn amount according to the availability of business funds. These features make it a great short-term financing option for your business.

Additional Read: Do current accounts have a minimum balance requirement?

Types of Current Accounts with Overdrafts

Here are the various types of current accounts with overdraft limit:

Premium Current Account:

The Premium Current Account is a tailor-made solution offering exclusive features for account holders. It accommodates a range of transactions, this account is ideal for individuals engaged in high-volume financial activities.

Standard Current Account:

Also known as the basic deposit account, the Standard Current Account is non-interest bearing and requires a minimum average balance. It provides essential services like NetBanking, and a cheque book facility. It suits those seeking fundamental banking services with a manager-approved overdraft facility and cost-free NEFT and RTGS transactions.

Packaged Current Account:

This account is positioned between the premium and standard accounts, the Packaged Current Account offers a balance of benefits. While less tailored than the Premium Account, it provides added advantages such as travel and accident insurance, making it a well-rounded option.

Foreign Currency Account:

It is designed for businesses involved in daily foreign currency transactions, this account facilitates outward and inward remittances. Despite dealing with foreign currencies, the account functions on the same fundamental principles as a standard account.

Single Column Cash Book:

Ideal for businesses operating without a traditional bank account, the Single Column Cash Book Account simplifies daily financial tracking. While lacking an overdraft facility, it enables meticulous monitoring through separate columns for debit and credit transactions.

Features & Benefits of Current Accounts with Overdrafts

Understanding the features of current accounts with overdrafts is helpful to ensure convenient business transactions. Here are the features:

Flexible Withdrawals: The bank tailors overdraft amounts based on individual or entity financial status, allowing for adaptable and tailored withdrawals.

Personalised Limits: Overdraft limits are uniquely customised, considering factors like income and account balance, ensuring a personalised financial approach to suit individual needs.

Cost-Effective: Interest rates, determined by financial parameters, are generally more economical than traditional loans, offering a financially advantageous option.

Charged on Utilisations: Interest applies solely to the utilised amount, not the entire approved sum, ensuring a cost-effective financing structure and avoiding unnecessary charges.

Interest Dynamics: Timely repayments are essential, as a current account overdraft interest rates may increase with defaults, underscoring the importance of adherence to repayment schedules.

Flexible Repayment: Repayments offer flexibility, allowing for either instalment or lump sum payments, providing financial convenience and accommodating individual financial situations.

Credit Score Impact: Overdrafts significantly influence credit scores, highlighting the need for punctual repayments to maintain a positive credit standing and financial credibility.

Current Account Overdraft Interest Rates

Having a clarity of the interest rate on overdrawn current accounts is very important.

Variable Interest Rates

Overdraft interest rates are generally variable and subject to change based on market conditions, economic shifts, and the bank's risk evaluation.

Annual Percentage Rate (APR)

APR encompasses the interest rate and associated fees, offering a comprehensive view of the borrowing cost. It facilitates comparisons with other credit forms, aiding informed decision-making.

Other Fees and Charges

Beyond interest, banks may levy fees like annual, maintenance, or transaction charges for overdraft facilities.

Factors Affecting Interest Rates

Creditworthiness Impact

Your credit history and assigned credit limit influence the interest rate on overdrawn current accounts. Better credit profiles often result in lower rates, reflecting financial reliability.

Minimum Repayments

Banks may mandate minimum monthly repayments. Comprehending and meeting these obligations is helpful to avoid unnecessary interest costs, requiring a clear understanding of the repayment structure.

Responsible Usage

Usage patterns influence overdraft interest rates. Regular or extended usage without a clear repayment plan may incur significant interest costs. Responsible and strategic use is essential for effective interest management.

Purposes of Overdraft Facility in Business

You can make use of the overdraft facility for current accounts to meet cashflow gaps. If you have outstanding invoices or delayed payments from customers, you can use this facility to cover day-to-day business expenses until the payments are received.

You can also use the overdraft facility to make unexpected payments for emergency repairs, replacements, etc.

If you have a seasonal business, you may witness fluctuations in revenue throughout the year. In such a case, you can use the overdraft facility to cover business expenses during periods of low cash flow, like off-seasons.

You can also use this facility to purchase bulk inventory or take advantage of discounts on bulk purchases.

Open a Current Account today!

If you have been using a Savings Bank Account for your business or your Current Account does not offer all the features you require for efficiently running your business, then consider opening a Current Account with Kotak.

Not only will you gain access to the Overdraft Facility but a range of other helpful features such as home banking services, payment and collection solutions, trade forex solutions, and more. The Current Account requirements, as well as the Current Account opening documents, are minimal.

Read also: What is Turnover in Business

FAQs About Current Account Overdraft Facilities

1.) Do all current accounts come with overdraft facilities?

To answer the question “do current accounts have overdrafts, usually, all current accounts automatically include overdraft facilities. It depends on the bank and the type of current account. Some accounts may offer overdraft options, while others may require a separate request.

2.) What is the difference between an arranged and unarranged overdraft?

An arranged overdraft is pre-approved by the bank, with agreed-upon terms and interest rates. In contrast, an unarranged overdraft occurs when you exceed the approved limit or don't have one, resulting in higher fees and charges.

3.) Can I increase or decrease my overdraft limit?

Yes, you can request to increase or decrease your overdraft limit. The bank will assess your request based on your financial situation and creditworthiness.

4.) What happens if I exceed my overdraft limit?

If you exceed your overdraft limit, the bank may charge higher fees and interest rates. It's essential to manage your overdraft responsibly to avoid unnecessary costs.

5.) What happens if I don't use my overdraft?

If you don't use your overdraft, there usually won't be any charges. However, it's helpful to stay informed about your account terms and conditions, as some banks may have specific policies or fees even if the overdraft is not used.