An Overdraft is a financial tool which is a line of credit provided by the banks to the individual and business entities. These facilities provide Businesses and Individuals access to funds beyond your available credit funds, ensuring that you are well covered for emergency expenses and other short term cash flow issues. In the current financial scenario, banks grant this facility to the customer’s savings account as well.
It is a type of credit facility whereas bank loan is a facility for borrowing a certain fixed amount of money. Using such facility, a user can withdraw cash as and when he requires up to the amount he needs. However, in bank loans, a fixed amount is given to the user irrespective of his financial requirement. The interest charged on the overdraft facility is only limited to the amount of money withdrawn. While in case of the bank loan, interest is charged on the amount sanctioned by the bank. An operational account is essential to use such financial facility, unlike the bank loan.
Business Overdraft:-
There can be multiple applications of Business Overdraft such as paying salary to the employees, managing or settling the invoices, buying stock and meeting other essential expenses.
The fees associated with bank overdraft are distinct from one bank to other bank.
These are the charges that may be applicable on overdraft:-
- Interest: It is calculated as a percentage of the amount that is overdrawn.
- Daily Fees: Certain types of banks may charge a daily fee on the amount that is overdrawn till the time it is repaid to the bank. However, there are alternatives to this such as there might be a weekly fee or a monthly fee. Generally, these fees are charged on the amount overdrawn.
- Fixed Setup Fee: For initiating the overdraft facility, the banks might also charge a fixed setup fee.
Advantages of Overdraft facility for business
- It acts as safety net: Since you would only require to pay interest on the money you actually overdraw, therefore, it could serve as a comparatively low cost safety net that you don’t even need to use.
- It has flexibility in terms of limits: It would enable you to communicate to the lender about the period you would like the business overdraft to be accessible for. There is a possibility that you may even be able to get it renewed according to your preference. You can close it any time you wish to but you will have to pay the outstanding balance or fees, in such a situation.
- Provides cash flow: When you are lacking in sufficient funds and need to meet the expenses, you can fund a wide range of business entities with the help of Business Overdraft facility. So, it keeps all your financial worries aside in a difficult financial position.
- Can be used as security: Both the secured and unsecured business overdrafts can be provided by the Lenders. However, a major advantage of a secured overdraft is that one may need to pay only a minimal interest rate in exchange for offering asset or property as security. In the case of unsecured loan, a higher interest rate would be charged. Therefore, it is better to go for the secured overdraft facility, considering it involves lower interest rate.
Conclusion:-
By analysing the various benefits attached to the Overdraft facility, it can be comprehended that opting for Overdraft facility for business, to meet an important financial need in any urgent or crisis situation would be of immense help. However, it should be considered only if it seems a viable option for a particular financial business need.
