Key points to consider before taking an overdraft facility

For millions of Indians, particularly small business owners, entrepreneurs, and the self-employed, overdraft facility provides flexibility during temporary financial shortfalls. Unlike traditional loans that disburse a lump sum amount, overdrafts offer the convenience of accessing funds only when needed, with interest charged only on the utilised amount.

 

“An overdraft account facility is a multifaceted component of finance extended by the bank. This facility permits clients to withdraw money even if it exceeds their available balance, within a pre-set limit. It is ideal for people, corporate businesses, or commercial undertakings when they reach a temporary shortage of cash flow or are faced with odd expenses. It could be described as a flexible facility since interest is charged only for the amount actually utilised and not all of the approved limits,” said Rajesh Katoch - CEO, EZ Capital.

 

Overdraft account facility ensures that important payments, such as bills or salaries, are not interrupted due to a lack of funds, hence avoiding penalties or bounced payments.

 

Overdrafts are usually linked to an individual account, be it savings or current, and are available to be used whenever needed. The facility works, especially for businesses, in managing working capital requirements or bridging short-term financial gaps. However, running on overdraft requires care, as excessive dependence can incur bigger interest costs.

 

Benefits of overdraft account facility

 

Quick access to funds: Overdraft facilities provide immediate access to cash during financial emergencies, eliminating the need for lengthy loan applications.

 

Cost-effective: Since interest is charged only on the withdrawn amount, overdrafts can be more economical than traditional loans.

 

Convenient repayment: The flexibility in repayment allows users to manage their finances more effectively, as there are no strict EMI schedules.

 

Improves liquidity: For businesses, overdraft facilities help maintain operational liquidity, ensuring timely payments and avoiding penalties or missed opportunities

 

Understanding the costs of overdraft

 

Interest rates: Overdraft interest rates are typically higher than regular loans (around 12-16 per cent annually). Confirm the exact rate your bank charges.

 

Processing fees: Many banks charge one-time or annual processing fees for maintaining the overdraft facility.

 

Penalty charges: Late repayments or exceeding your overdraft limit can result in substantial penalties.

 

Points to keep in mind while using overdraft facility

 

Use for short-term needs: Overdrafts are designed for short-term cash flow management, not long-term financing.

 

Regular monitoring: Actively track your usage to avoid excessive reliance on the facility.

  Impact on credit score: Frequent overdrafts that remain maxed out can negatively affect your credit score.