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- Know about Overdraft facility and how it works
- Some important features of the overdraft facility and the advantages and disadvantages
- Things keep in mind while taking Overdraft
- List of Required Documents
When a business needs funds and you are looking for a short term fund then instead of taking business avail the advantage of overdraft facility. It is generally a short-term loan facility for 12 months, which is renewable every 12 months. The interest rate will be charged on the amount which you are using. To take overdraft you must be a current account holder.
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Table of Contents
What is an Overdraft Facility?
Overdraft is a limit that is established in the customer’s current account. In overdraft facilities, you can withdraw money when your account is zero, so a credit limit is set on your balance in your current account. This facility is used for short term purposes and is easily available in any financial institution. The interest rate is calculated daily on the fluctuating outstanding balance therefore the interest rate will be fixed.
Things to Keep in Mind While Availing Overdraft Facility
- The overdraft will be decided based on the account holder’s balance, so it can be given against bank FDs, shares and bonds.
- The rate of interest will be determined based on the nature of your business and the assets given as collateral.
- The overdraft facility is just like a loan but in it, you pay interest on the amount used on a daily basis.
- An overdraft facility can help you for personal and business purposes like irregular cash flow, business fluctuations.
- It is a short term credit facility generally for 12 months, which is renewable after every 12 months.
- Proprietorship Firm
- Limited Liability Partnership
- Public or private limited entries
- Business Vintage for a minimum of 2 years
- Last 12-month current account statement
Features and Benefits of Overdraft
- Interest rate is calculated on the daily fluctuating outstanding balance. The interest rate is calculated on a daily basis.
- The repayment method is very easy so it can be done through bank deposits.
- Setting up insurance for your overdraft will ensure that you should be covered and you will no longer be able to pay your dues.
- An overdraft helps small business owners maintain a good payment history, which reduces the risk of direct debit or cheque bouncing.
- You can get this overdraft facility jointly.
- You can manage your overdraft account online according to your comfortability.
- Do not have to pay any prepayment and foreclosure charges.
- Get Instant Disbursement in your current account after completing all the documents.
How Does Overdraft Works?
Basically the overdraft facility works as an approved loan amount. This gives access to a set amount beyond the cash in your account and will work even if you have zero or insufficient balance in your account. By taking the overdraft facility, you are increasing your bank balance on your bank account, so if you deposit funds, the balance is automatically reduced. But the interest rate has to be paid only on the amount borrowed.
Advantage and Disadvantage of Overdraft Facility
|Advantages of Overdraft||Disadvantages of Overdraft|
|It is very quick to arrange the overdraft facility.||Not suitable for high amount|
|You have to pay interest only on used amount.||The amount to be repaid for the short period of time|
|It is good for short term to increase your cash flow||Interest and charges are paid|
|There is no restriction on usage of funds even if your account is zero.||It can be renewed every year|
|This helps ensure timely payment and avoid late payment penalties.||It is mandatory to have a current account to avail overdraft facility.|
|No collateral and security will be needed||It will be expensive if you use for the longer period|
|It helps to keep the record perfectly||There will be risk in the reduction of the limit|
These are documents that are required for overdraft facilities.
|KYC||Income Proof||Loan Documents||Business Documents|
|- Pan Card|
- Aadhaar Card
- Voter ID Card
- Rent Agreement
- Registered Lease Deed
- Electricity Bill
|- ITR with Computation of Income|
- Profit & Loss Account
- Balance Sheet
|- Sanction Letter|
- Up to Date Loan Account Statement
- Loan Repayment Track
- 12 Month up to Date Bank Statement Showing Repayment of the Loan
- Loan Closure Proof if Loan is Closed
- Sale Tax
- Latest office Address Proof
- Company Profile on the Letter Head of the firm
- Latest Bank Account Statement
- Memorandum & Article of Association
Note:- If you have taken a loan before, then you will have to provide all the relevant loan documents mentioned above.