The Importance of Overdraft Facility in Current Account

Posted on Wednesday, March 6th, 2024 | By IndusInd Bank

Current accounts serve as a cornerstone of banking for millions of business owners across India. You use these accounts to receive client payments, pay bills, and manage everyday transactions. Yet, nestled within this familiar framework lies a feature that holds significant importance over your financial well-being: the overdraft facility.

Essentially, an overdraft facility acts as a vital safety measure during unforeseen expenses or temporary cash flow challenges. Surprisingly, despite the benefits the overdraft facility of a current account offers in managing cash flow, many business owners remain unaware of or underutilise it. This oversight can be because of a lack of awareness or a related misconception. If you want to utilise this invaluable resource, you’ve come to the right place. Let us help you better understand the overdraft facility of current accounts.

What is an Overdraft Facility?

An overdraft facility is a banking service provided by banks, enabling account holders to withdraw funds exceeding their current account balance, up to a predetermined limit. It is one of the benefits of a current account, providing a buffer to cover short-term financial gaps.

When you make a transaction that exceeds your account balance, the bank covers the shortfall and approves it, effectively extending credit to you. You should also know that:

• This form of temporary line of credit is subject to interest charges, calculated based on the amount overdrawn and the duration of the overdraft.
• Overdraft facilities have specific terms and conditions, including an overdraft limit, interest rates, and fees.
• It is intended for short-term use and should not be relied upon as a long-term solution for financial difficulties.
• You need to pay interest based on the amount utilised and the duration of its use, whether spanning a few days or extending over several weeks. Unlike traditional loans, where interest accrues on the entire sum borrowed, overdraft interest charges are incurred only on the portion of funds drawn beyond the account balance.
• The bank retains complete discretion over the repayment terms and duration, maintaining full authority and control over usage.

Also Read: What are Regular Current Account Fees & Charges?

How Can an Overdraft Facility Benefit Your Business?

Here are some ways in which an overdraft facility can benefit your business:

1. Cash flow management

One of the primary advantages of an overdraft facility is its ability to provide a cushion for managing cash flow fluctuations. It allows businesses to bridge temporary gaps between incoming revenue and outgoing expenses, ensuring continuity in operations without disruption. In case you are still using a savings account for business needs, you can open a new current account online in a few steps.

2.  Working capital optimisation

An overdraft facility can also empower your business by providing access to additional funds on an as-needed basis. It enables you to seize growth opportunities, such as investing in inventory, expanding operations, or taking advantage of supplier discounts.

3.  Emergency funds

Unexpected expenses or emergencies can arise at times, posing a challenge to business finances. An overdraft facility serves as a readily available source of funds, providing peace of mind knowing that liquidity is accessible when needed most. While you cannot earn interest on current accounts, you can access this facility for emergency needs.

4.  Flexibility in borrowing

Unlike term loans with fixed repayment schedules, overdraft facilities offer flexibility in borrowing and repayment. You can draw funds as required and repay them at your own pace unless the bank asks for partial/full repayment.

In conclusion, you cannot overstate the importance of overdraft facilities in current accounts. They serve as invaluable tools for addressing short-term financial needs and seizing growth opportunities. Want to open a new current account? Click here.

Disclaimer:

The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.