Oftentimes, business owners find themselves in situations where they need additional funds. It is done for the business to operate efficiently. These drawbacks may hamper and stop business operations for some time. This is not beneficial for any business, either large or small. Any shortfall in the business means money is lost. If you are a business owner with a shortage of funds, an overdraft loan facility is for you.
According to a survey, overdraft revenue for the fourth quarter of 2022 alone was approximately $1.5 billion. It is lower than in the fourth quarter of 2019. With a decrease of 48% compared to before the pandemic. It suggests an annual reduction of over $5.5 billion going forward.
What is an Overdraft Facility? An Overview!
An overdraft (OD) is understood as a credit facility. It allows a borrower to take an OD loan. It is mainly used to finance business expenses. This facility usually allows borrowing money from the bank. Even at times, if the savings or current accounts do not have sufficient funds. As it talks about an extension of a monetary limit. It is given by banks and the money. Whichever is withdrawn is actually “overdrawn.”
By using this facility, you can easily avail a certain limit of funds. This varies from one bank to another. It highly depends on the client’s relationship with any bank. In exchange for the facility, which is like a loan, banks charge you interest. But only to the extent of the utilised fund or capital. It is out of the total amount allowed.
For example, Rita is a small-scale retail business owner. Her business sales are always fluctuating. In a single month, her business receives a great inventory order.
It is that she must pay for it immediately. But her business checking account only has Rs 4 lakh. However, the invoice is Rs 5 lakh. Instead of delaying the payment, Rita uses an overdraft facility. It allows her to withdraw an additional Rs 1 lakh.
The bank charges her a rate of interest fee. It is done on the amount overdrawn until she repays the Rs 1 lakh. The upcoming week, after receiving a payment from one of his major clients. Rita makes sure to deposit the capital into her account positively. It clears the overdraft, involving the interest charges.
Features of an Overdraft Facility:
There are various significant features of an Overdraft Facility. It is relevant for new entrepreneurs and business owners. Some of them are as follows:
- An Approved Credit Limit – an overdraft facility is given to borrowers according to a fixed limit. It is lent by banks to the business. Always changing from one borrower to another.
- The Rate of Interest – The interest is only charged based on amounts utilised by a borrower.
- No Repayment Charges – There is always a repayment charge. It is on any loan you avail. But, there is no such charge that borrowers have to pay.
- Repayment Anytime – It allows you to repay borrowed amounts at any period. Thus, this repayment structure is different from others. There is no fixed EMI structure. Nonetheless, certain lenders provide an OD Loan. It is for businesses that may insist that you make payments at certain times.
Uses of an Overdraft Facility
There are various uses of an overdraft facility in your business. Some of them are mentioned below:
- Business owners take an Overdraft Facility for financial requirements
- It is easily availed, with loans being sanctioned quickly
- It does not require much paperwork and lengthy procedures
- It is the most easy and flexible way to get credit
- For small businesses in urgent need of funds or capital.
Conclusion:
In brief, Overdrafts are useful tools for managing cash flow issues. Especially in the short term. It should however never be relied on as long-term financing solutions. You must understand the terms and conditions of Overdrafts. It is included in repayment and interest. It is also very important to monitor your Account regularly at various intervals. It is typically used to avoid overdraft fees. Along with over-usage of an overdraft facility.
