Guidelines on Overdraft facility
An overdraft loan is a versatile financial product that allows businesses to access additional funds from their current account up to a pre-approved limit. This facility offers businesses the flexibility to manage their short-term cash flow needs without the need for a separate loan application each time additional funds are required. Interest is only charged on the amount overdrawn, making it a cost-effective solution for managing unexpected expenses or temporary cash shortages. Below, we explore the key guidelines, maximum limits, and documentation required for availing of an overdraft loan.
How Does an Overdraft Loan Work?
An overdraft loan enables businesses to withdraw more money from their current account than the available balance, up to a certain pre-approved limit. This borrowed amount can be used for various purposes such as managing operational expenses, purchasing inventory, or covering payroll during lean periods.
The flexibility of an overdraft loan lies in its repayment structure—borrowers can deposit funds back into the account at any time to reduce the outstanding balance and save on interest costs. Likewise, additional withdrawals can be made up to the sanctioned limit as long as the account remains within the approved overdraft limit. Interest is calculated daily on the fluctuating balance and is typically charged at the end of the month.
Interest Charges on Overdraft Loans
The interest on an overdraft loan is only charged on the amount that has been withdrawn beyond the account balance, and for the duration that the amount remains overdrawn. This makes it a cost-effective option for businesses that need temporary access to funds, as they only pay for the credit they use. The interest rate on an overdraft loan can vary depending on the bank’s policies and the borrower’s creditworthiness.
Maximum Limit for Overdraft Loans
The maximum overdraft limit sanctioned to a business depends on several factors, including the account holder's banking transactions, account conduct, and the financial history as assessed by the bank over a period of 12 months.
Documents Required for Availing Overdraft Loans
The documentation required to secure an overdraft loan is minimal, especially for existing customers. Here’s a breakdown.
For Customers with Pre-Approved Offers
No additional documents are required. The bank already has sufficient information based on the customer's transaction history and account conduct.
For New to Bank Customers
Bank Statement: A statement from the customer’s existing bank account may be required to assess their banking transactions and financial health.
No Additional Physical Documentation: Typically, no further documentation is necessary unless specified by the bank.
For Partnerships and Companies
Memorandum of Association (MOA): This legal document is necessary to verify the business’s registration and operational scope.
Board Resolution: A resolution passed by the company’s board may be required to authorise the overdraft facility and designate the signatories.
An overdraft loan provides businesses with a flexible and cost-effective way to manage short-term financial needs. With interest charged only on the amount overdrawn, it allows businesses to better manage their cash flow while keeping costs low. Understanding the maximum limits and having the required documents ready can streamline the process of securing an overdraft loan, enabling businesses to respond quickly to financial challenges. Whether you are an existing customer with a pre-approved offer or a new customer establishing a relationship with the bank, an overdraft loan can be a valuable financial tool when used wisely.
