The popularity of credit facilities has multiplied over the past decade due to digitisation. Factors like the availability of government schemes and an increase in the number of financial institutions have also contributed to such popularity.
The Indian financial market today offers several credit options for businesses. Borrowers can boost their financial standing considerably by accessing these credit options. For instance, with an invoice discounting service, businesses can regulate their cash flow. Another credit facility that has gained favour among borrowers is the overdraft loan option.
This facility allows businesses to withdraw money from a savings or current account even when its balance reaches zero. The concerned financial institution sets a specific withdrawal limit for an account holder over and above his/her existing balance. If, for instance, an individual holds Rs. 7,5000 in his/her savings account and the bank sanctions an overdraft limit of Rs. 25000, that account holder can withdraw Rs. 1 Lakh in total.
Such limit depends on an individual’s repayment history, credit score, and existing relationship with the financial institution. Businesses can utilise this loan facility to finance their cash flow requirements conveniently. Several businesspersons consider availing the bank overdraft loan facility over term loans to resolve working capital needs of their enterprises.
Alternatively, with KredX, businesses can efficiently optimise their working capital needs by leveraging unpaid bills of debtors to avail a cash advance in no time.
Financial institutions primarily offer two types of overdraft facilities –
Individuals or businesses can access the overdraft facility by collateralising any asset, like a term deposit, real estate property, shares and bonds. Apart from that, financial institutions also provide overdrafts against a borrower’s savings or salary accounts.
Under the Pradhan Mantri Jan Dhan Yojana, for example, account holders are allowed an overdraft limit of up to Rs. 10,000. One needs to link the Aadhaar card with the bank account to avail this scheme’s benefits.
In the case of overdrafts against any other collateral, the withdrawal limit, as well as the interest levied, depends on the value and nature of the pledged asset.
Businesses can also access unsecured overdraft facilities, i.e. financing without any collateral. Applicants need to satisfy stringent eligibility criteria to avail this line of credit. That’s because the risk a financier is assuming in extending an unsecured business overdraft loan is significant compared to its secured counterpart. The cost of such a loan is also higher.
This credit facility works in the following manner –
Individuals can enjoy the following benefits by availing this credit facility –
Organisations with a business overdraft loan can access external funding anytime. It allows businesspersons to address any emergency financial obligation in their enterprises with ease. Individuals can also use this loan facility to mitigate personal emergencies.
Businesses can streamline their working capital cycle efficiently by utilising this credit facility. They can use it to pay suppliers on time, finance daily operations, disburse wages, etc.
With a regular business loan or personal loan, the borrower has to pay interest on the entire sanctioned amount. It leads to higher total interest accrual, net amount payable, as well as the EMIs.
In the case of an overdraft loan, businesses or individuals can pay interest only on the utilised amount and not the entire sanctioned limit. It reduces the interest payable and resultantly, the EMIs.
The downsides of this credit option are –
In the case of an overdraft loan, interest calculation takes place on a daily basis. Also, the interest rate and fee levied can be considerable when it’s an unsecured overdraft facility. In comparison, options like invoice financing service can be cost-effective for business finances.
Financial institutions require applicants to satisfy stringent criteria to qualify for an overdraft facility. It’s more so the case with an unsecured loan.
Alternatively, individuals can avail invoice discounting services from KredX by fulfilling minimum eligibility criteria and formalities to access a cash advance within 24 – 72 hours*.
Nevertheless, it is essential to employ such an advance appropriately. It allows businesses to optimise their financial standing and improve cash flow.