Understanding The Overdraft Facility in a Current Account

01 AUGUST, 2023

As a business owner, it is crucial to have instant access to short-term credit on good terms. This allows you to mitigate business risks and handle unforeseen expenses while taking advantage of time-sensitive business opportunities. And when you have a Current Account that is designed to meet all your business and banking needs, you can make use of the overdraft facility. 

What is an Overdraft Facility?

Say it is the end of the month, and you still need to receive all your accounts receivables. You only have Rs. 30,000 in your Current Account, but you must buy raw materials worth Rs. 50,000 to meet your orders in time. When you have the Overdraft Facility in your Current Account, you can pay Rs. 50,000 despite only having Rs 30,000 as a balance. The gap of Rs. 20,000 will be fulfilled through the Overdraft Facility. Thus, the Overdraft Facility allows you to withdraw more money than is available in your Current Bank Account. 

How Does The Overdraft Facility Work?

Depending on the type of Current Account you have, your usage and requirements, your credit score, and your repayment history, there will be a certain limit up to which you can overdraw. 

One of the best parts about the Overdraft Facility is that the interest will be charged only on the amount you utilise and not the entire specified limit. The interest will also be charged only when you use the additional funds. 

Another helpful feature of this facility is that you do not have to pay back the amount in Equated Monthly Instalments (EMIs) like in other loans if you don’t want to. Instead, you can repay the overdrawn amount according to the availability of business funds. These features make it a great short-term financing option for your business. 

Additional Read: Do current accounts have a minimum balance requirement?

Purposes of Overdraft Facility in Business

• You can make use of the overdraft facility to meet cashflow gaps. If you have outstanding invoices or delayed payments from customers, you can use this facility to cover day-to-day business expenses until the payments are received.
• You can also use the overdraft facility to make unexpected payments for emergency repairs, replacements, etc. 
• If you have a seasonal business, you may witness fluctuations in revenue throughout the year. In such a case, you can use the overdraft facility to cover business expenses during periods of low cash flow, like off-seasons. 
• You can also use this facility to purchase bulk inventory or take advantage of discounts on bulk purchases. 

Open a Current Account today!

If you have been using a Savings Bank Account for your business or your Current Account does not offer all the features you require for efficiently running your business, then consider opening a Current Account online or offline with Kotak. 

Not only will you gain access to the Overdraft Facility but a range of other helpful features such as home banking services, payment and collection solutions, trade forex solutions, and more. The Current Account requirements, as well as the Current Account opening documents, are minimal. Hence, you can seamlessly open it online in just a few clicks and empower your business.

T&C Apply