Do you own a Startup? Are you looking forward to applying for an overdraft loan but confused about what it is? Keep reading further to understand the concept of overdraft loans or bank overdraft facilities.
Here we will explain everything about overdraft loans, benefits, how to put them to use to gain the best results and from where you can get the best overdraft loan with minimum procedures. Read ahead to find out more!
What is an Overdraft Loan?
Before diving into overdraft loans’ benefits, let us define their benefits. An overdraft loan, also known as a bank overdraft facility, is a form of credit that allows you to borrow money from bank when your account balance is zero or negative.
When you open a business account, you will typically be given a certain amount of overdraft protection. This protection allows you to withdraw more money than you have in your account up to a specific limit. When you do this, you will be charged interest on the amount you’ve overdrawn until you deposit enough money to bring your account back into the positive.
OD Limit for Business
The Overdraft (OD) limit for businesses in India can vary based on various factors, including the financial health of the company, its creditworthiness, and the lending institution’s policies. There is no fixed or standardized OD limit for business applicable to all companies in India.
The lender determines the OD limit for business after assessing the business’s financial statements, cash flow projections, collateral (if any), credit history, and other relevant factors. The limit is usually a percentage of the business’s annual turnover, or a specific amount based on its financial position.
It’s important to note that banks or financial institutions may have other criteria and parameters for granting OD limits. Moreover, the OD limit for business may also be subject to periodic reviews and adjustments based on the borrower’s repayment behaviour and overall business performance.
To determine the specific OD limit for business in India, it is advisable to approach banks or financial institutions and discuss with their representatives. They will evaluate the business’s financials and provide details on the applicable OD limit based on their lending policies and assessment of the business’s creditworthiness.
What are the Benefits of Taking Overdraft Loans?
Now that we’ve defined an overdraft loan let’s explore the benefits of using this type of credit for your business.
Helps managing cash flow
One of the most significant advantages of overdraft loans is that they can help you manage your cash flow effectively. As a business owner, you may experience periods where you have more expenses than revenue. During these times, an overdraft loan can provide you with the funds you need to cover your costs until your payment catches up.
For example, you run a retail store and experience a slow sales month. Your expenses, such as rent, utilities, and employee salaries, still need to be paid even though your revenue is down. In this situation, an overdraft loan can help you cover these expenses until your sales increase.
Flexible repayment terms
Another advantage of overdraft loans is that they often come with flexible repayment terms. Unlike traditional loans, which typically have set repayment schedules, overdraft loans allow you to repay the borrowed funds at your own pace.
For example, if you’ve overdrawn your account by $5,000, you can repay that amount over several months rather than making a large lump-sum payment. This can help you manage your cash flow more effectively, as you can repay the loan when it’s most convenient.
Quick access to funds
When you require it quickly, overdraft loans can provide a solution. Unlike traditional loans, which often require a lengthy application process and extensive documentation, overdraft loans can be accessed quickly and easily.
In most cases, you only need to contact your bank and request an overdraft loan. The funds will be available immediately if you have already been approved for overdraft protection. This can be particularly useful if you require cash quickly to cover an unexpected expense.
Less expensive than other forms of credit
While overdraft loans come with interest charges, they can often be less costly than other forms of credit, such as credit cards or lines of credit. This is because overdraft loans typically have lower interest rates and fees than diverse types of credit.
Helps building credit
Finally, overdraft loans can help you build your credit score. Using your overdraft loan responsibly and making your payments on time can help you establish a positive credit history, which can be beneficial if you need to borrow cash in the future.
Additionally, overdraft loans are typically linked to your checking account, so they are considered revolving credit. As you repay the loan, you will have access to the funds again. This revolving credit can help you build a strong credit history over time.
How to Use Overdraft Loans Responsibly?
While overdraft loans can be a valuable tool for managing your business’s cash flow, using them responsibly is essential. Here are a few ways to assist you in using overdraft loans wisely:
- Overdraft loans should be a last resort when you need cash quickly. They should be used as something other than a long-term financing solution.
- While overdraft loans offer flexible repayment terms, it is essential to repay the loan as soon as possible to minimise interest charges.
- Keep a close eye on your account balance to avoid overdrawing your account unintentionally. Overdraft fees can be expensive, so it is essential to avoid them whenever possible.
- While overdraft loans can be a helpful tool for managing your cash flow, it is essential to plan and work towards a favourable cash flow situation.
Overdraft loans can be a valuable tool for managing your business’s cash flow. They offer flexible repayment terms, quick access to funds, and can be less expensive than other forms of credit. It is essential to use overdraft loans responsibly and only borrow what you need. Doing so can help your business thrive. So, if you are looking forward to such loans, contact HDFC Bank today! With minimum procedures and representatives to help you at every step, you will have a hassle-free experience! Apply now for HDFC Bank overdraft facility!