Are you looking to open a Current Account and wondering about the additional benefits it can provide? One such advantage is an overdraft facility, which can help you meet your financial needs during challenging times.
What is an overdraft facility in a Current Account?
The overdraft facility is an arrangement provided by banks that allows Current Account holders to withdraw more funds than what they currently have in their accounts. It acts as a short-term credit facility, bridging the gap between expenses and available funds. This flexibility can be vital for small businesses that often experience irregular cash flows or unexpected financial demands.
Features of the overdraft facility
- Pre-approved limit: When you open a Current Account, you can discuss with your bank the maximum limit up to which you can overdraw funds. This pre-approved limit is determined based on factors such as your business’s financial health, transaction history, creditworthiness, and relationship with the bank. It is essential to clearly understand this limit to avoid exceeding it and incurring additional charges.
- Interest charges: Overdrafts are not free funds. Banks charge interest on the amount you overdraw from your Current Account. The interest rate can vary depending on the bank and the terms of your agreement. It is crucial to compare interest rates and understand the terms before utilising the overdraft facility to ensure it remains a cost-effective option for your business.
- Flexible repayment: Unlike conventional loans, the overdraft facility offers repayment flexibility. This flexibility allows you to use the overdraft as a short-term solution to bridge temporary gaps in funds. You can repay the overdrawn amount as soon as your cash flow improves, allowing you to manage your business’s finances according to its specific needs.
Types of overdraft accounts
- Secured overdraft: A secured overdraft is backed by collateral, such as fixed deposits, property, or investments. Secured overdrafts benefit individuals with substantial assets or those looking for higher borrowing limits. By providing security, you minimise the risk for the bank, which may result in a higher credit limit and lower interest rates.
- Unsecured overdraft: An unsecured overdraft does not require any collateral. The bank assesses your creditworthiness based on your income, credit history, and relationship with the bank. Unsecured overdrafts generally have lower credit limits and higher interest rates than secured overdrafts.
How is an overdraft paid back?
Repaying an overdraft is crucial to maintain a healthy financial relationship with your bank. Here are a few common repayment methods:
- Lump sum repayment: You can repay the overdraft in full whenever you have surplus funds. This method can decrease the total interest paid and allow for an earlier closure of the overdraft facility.
- Automatic repayment: Some banks may automatically deduct the outstanding amount from your account when income is credited. This method ensures timely repayment without any additional effort on your part.
- EMI (Equated Monthly Instalment): In this approach, the outstanding amount is divided into fixed monthly instalments, including interest. It allows you to repay the overdraft over a specified period, making it more manageable.
To wrap up
Opening a Current Account provides various benefits, and one of the most valuable features is the overdraft facility. Remember to manage your Current Account with overdraft facility carefully, stay within the credit limit, and make timely repayments to maintain a healthy financial relationship with your bank and a good credit score.