Running a business requires a steady flow of capital, as this is what keeps work going. Expenses are a key part of business, and you may not always have the capital in hand to do so. Thankfully, there are several external financing options available, one such being the overdraft facility.
Unlike a term loan, wherein you borrow a corpus and repay it back over a set period of time and interest rate, a bank overdraft offers flexibility. These are extended to corporates and businesses, and they enable access to funds over and above the amount available in the account.
Much like an LOC (Line of Credit), financial institutions offer this privilege to select customers only, and it has several advantages. As such, it is important that you understand all you can about the bank overdraft, especially if you are a business owner.
Read on to know more about the bank overdraft loan facility.
What Are Bank Overdrafts?
A bank overdraft refers to a financial facility offered to your business, allowing you to withdraw money against your account. This is over and above your current account balance. In simple words, the bank offering this facility extends credit, allowing you to meet your financial needs when you make a transaction exceeding your existing account balance.
Hence, this overdraft loan facility covers for the financial shortcomings of the transaction you make. Remember that the overdraft amount is considered a loan, and you are charged interest on this borrowed amount.
Overdraft facilities can help you successfully manage your short-term cash flow requirements, and any unforeseen expenses or cover temporary financial gaps. Since you are charged interest on the borrowed amount, it is crucial to use the overdraft facility carefully and keep a tab on it.
Who Can Avail Bank Overdrafts?
To avail the benefits of an overdraft loan facility provided by financial institutions, you are required to meet specific eligibility criteria. This is essential as lenders need to understand your financial standing, repayment capacity and creditworthiness.
Note that eligibility parameters may vary with different financial institutions. Here are some common eligibility criteria to avail a bank overdraft facility, some of which may be similar to a term loan:
- The minimum age requirement is 21 years
- You need to have an existing account with the bank/lender
- A stable income and employment
- A good credit score
- An adequate business vintage
What are the Various Features of an Overdraft Loan Facility?
Here are some features of a bank overdraft loan facility that can help you decide if this facility is a suitable option for you:
1. Immediate Access to Funds
A bank overdraft facility can assist you in getting funds quickly and conveniently. With this option, you can cover both your planned and unexpected financial requirements you may incur while doing your business.
2. Handling Unexpected Transactions
Sometimes, you may need to pay immediate funds to meet your working capital requirements or other expenses. In such a scenario, opting for a bank overdraft is ideal, as you get funds to handle such unexpected transactions conveniently and in a hassle-free manner.
3. Flexible Overdraft Limits
Many banks also offer pre-approved overdraft facilities, using which you can customise the limit you get access to. This flexibility helps you to set an overdraft limit that specifically matches your requirements, so that you always have capital when needed.
4. Cost-Effective Borrowing
Bank overdraft facilities are comparatively more affordable than other credit options in the market. Despite the fact that you have to pay interest on this overdraft loan facility, the rates charged on these are lower. This makes it an affordable option.
What are the Key Terms of a Bank Overdraft?
Here are some key terms of a bank overdraft loan option you must be aware of:
1. Overdraft Limit
There is a limit on the funds you can avail through the bank overdraft facility, which is fixed by the lender. However, some banks offer you an option of customising this limit based on your creditworthiness, account balance, income and other factors.
This is one of the essential differentiating factors of the facility compared to a term loan.
2. Interest Rate
There is an interest that you need to pay on this bank overdraft facility. Paying the interest without any delay is essential to avoid its accumulation, thereby increasing your loan borrowing costs.
3. Fees and Charges
There are certain fees and other charges applicable to the bank overdraft facility, similar to a term loan. These include maintenance fees, transaction fees and other related charges. Hence, you need to carefully review the fee structure before opting for it to understand borrowing costs.
4. Repayment of an Overdraft
Bank overdraft facilities are short-term borrowings which require quick repayments. Most banks have set a repayment period of 30 days, though it varies across banks.
Understanding the repayment structure of a particular bank can help you avoid unnecessary accumulation of interest as well as late payment penalties.
How to Apply for a Bank Overdraft?
now that you have a brief idea of the bank overdraft facility, Check out the application process:
1. When the Bank Overdraft Facility is Pre-Approved
Sometimes, you have the option to avail a pre-approved overdraft offer. You can get this offer if you have been maintaining a good relationship with your bank. In this case, your shortfall in funds is automatically covered. This means if you make a transaction higher than the available balance in your account, your overdraft facility gets automatically activated.
2. When Bank Overdraft Facility is Not Pre-Approved
If you plan to avail a bank overdraft facility, you can contact your bank to understand the process involved and the applicable charges you may need to pay. All you have to do is fill out an application form and submit the same with supporting documents.
Then, wait for the approval of your bank, and you are all set to use funds.
As you can see, a bank overdraft presents a range of benefits when seeking short-term funding solutions. The flexibility offered by this funding option allows access to credits quickly and conveniently, through a simple application process. Therefore, seeking an overdraft facility or an overdraft loan can be a great way of covering your short-term financial needs.
