How can the overdraft facility in a Current Account help your business?

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27 APRIL, 2023

There might come a time when your business expenses might be slightly more than the funds in your bank account. How do you tackle this? By taking a loan or using your Credit Card? A better alternative could be an overdraft facility. By opting for an overdraft facility, you can get the necessary funds immediately and avoid a lengthy application process. So, what is this overdraft facility in a Current Account, and how can it help you? Let’s find out.

What is an overdraft facility?

An overdraft facility is a financial arrangement between you and the bank that allows you to overdraw on your business Current Account balance up to a certain limit for a fixed period of time. The overdraft facility can help you meet your urgent needs rather than raising money from other alternatives.

Features of the overdraft facility

Based on your income, financial stability, and account balance, the bank could assign you a fixed amount to withdraw as an overdraft. This is different for every individual/entity.
Depending on the parameters mentioned above, your interest rate would also be determined when you use the facility. This tends to be cheaper than a loan in most cases.
Unlike traditional loans, the interest would be charged only on the amount you utilise or withdraw, not the entire approved amount. However, the interest might increase if you default on the repayment.
Like with other financing options, the overdraft facility impacts your credit score. Hence, you should avoid defaulting on the payments. Usually, you can pay it in parts or as a lump sum, as and when you have the funds.

Types of overdraft facility

There are different types of overdraft facilities that you can avail of. While an unsecured overdraft is available, it may also have a higher interest rate. On the other hand, you can choose from the secured overdraft facilities for a lower interest rate. Here are a few options for it.

Overdraft against house or property - This can be availed even if you have a loan on the house. Banks usually approve 50% of the property value under this.
Overdraft against fixed deposit - A fixed deposit can also be pledged for an overdraft facility. You can get up to 75% of the value of the fixed deposit as the overdraft limit.
Overdraft against insurance - This overdraft is based on the surrender value the insurance company would give if you terminate the policy before maturity.
Overdraft against equity holdings - Although a valid alternative, equity holdings are subject to market risks, and hence the value offered against this is often on the lower end.
Overdraft against salary - If you have a salary account with the same bank, you can avail of an overdraft of up to twice your monthly income.

In a nutshell

A Current Account with an overdraft facility can be of great help in times of financial emergencies. You can utilise the funds as needed and pay interest only on the amount borrowed. However, you need to use and manage this facility carefully because you don’t want it to snowball into a huge debt that burdens your profits. Also, make sure to repay the funds without default to maintain your credit score.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.