Bank overdraft refers to a facility, which is extended by banks to businesses to withdraw funds from their current account over and above the balance on provision of a collateral or security. The facility is provided in exchange for an interest on the excess withdrawn amount for the duration it is borrowed. Note that it is one of the important features of current account that helps businesses handle their fund mismatches better.
Check out 6 crucial benefits of availing overdraft facility
- Manages timing mismatches of fund flow
Current account with overdraft facility is a suitable option for organizations or companies with greater cash flow movement at a given time frame. Bank overdraft facilities assist to reset the skipped rotation cycle of cash inflow and outflow. In simpler words, if the sale proceeds and buys lead to flow of cash in and out during a week or month, an overdraft bank facility can manage the cash flow gap, if any that may come up owing to timing mismatch.
- Helps in keeping a good company track record
Usually, organizations often require waiting for payments from their customers or clients, which may lead to delayed payment from their end for meeting their staff salaries and various other working capital requirements. Overdraft facility can help such businesses sign cheques for their crucial monetary requirement beyond the available fund in their current account. As businesses can borrow over their account balance, these facilities can prevent cheque dishonors, which indirectly helps to maintain the business reputation.
- Allows to make timely payments
Overdraft facilities even ensure timely payments as well as avoidance of any late payment penalties as with this facility, payments can be made even if there is inadequate balance in the current account.
- Minimum documentation requirement
Owing to its secured nature, the overdraft facility needs less documentation that otherwise is needed in case of long-term loans and unsecured loans.
- Higher flexibility
Overdraft facility comes with the benefit of flexibility which means businesses can avail it anytime, for up to the allotted amount at flexible repayment tenures.
- Less interest amount charged
Interest amount is calculated just on the fund amount used. It provides higher savings on interest costs as compared to other credit options available for a flexible period. In the case of other credit options, interest must be repaid even if the borrowed amount is unused. However, for overdraft facilities the interest gets charged just on the amount overdrawn and stops instantly on repayment of the borrowed amount.
Overdraft facility is a helpful financial instrument, which businesses can use to withdraw funds beyond their current account balance. An authorized limit is assigned on bank overdraft for every business based upon their relationship with the existing bank. Businesses can withdraw the fund up to the limit assigned by the bank to mitigate their fund shortfalls. Remember, like most credit options, such facilities too come with their own set of advantages, which businesses should know of in order to gain most from them.