Every business needs capital to function smoothly, capital for machinery, capital for day to day business, capital to pay salaries etc. However, there are certain expenses which are unplanned and uncertain. It is difficult to arrange funds in such cynical events, especially if you don’t have much savings in your account. There are various options of getting the finances, a personal loan against gold etc. However, these options take time for approval and disbursement of funds. Bank Overdrafts can be certainly a viable option in such circumstances.
What is bank overdraft:
A bank overdraft is the credit facility provided by banks in which you can withdraw the funds above the account balance when you don’t have sufficient funds in your bank account. It is thus an extension of the monetary limit of your account and the money used is said to be ‘Overdrawn’.
Can anyone get a bank overdraft?
There are two types of bank overdraft; Secured overdrafts and Unsecured Overdrafts. Secured Overdrafts are provided against one salary and savings account. Banks and financial institutions also provide overdraft facilities against collateral and are known as unsecured overdrafts. The overdraft facility provided by banks depends on the bank and customer relationship. The limit of the credit facility is determined based on the bank balance, repayment history and credit score and varies from bank to bank.
Advantages of bank overdraft:
- A bank overdraft offers a flexible line of credit as there is no restriction on how you can use the funds through an overdraft facility. You can use the capital to buy equipment, for a business deal, for managing day to day expenses, paying wages or salary etc.
- Also, there is no obligation to use the overdraft facility. You can use the overdraft facility as and when you need it. You don’t need to seek permission or consent from the bank.
- Banks charge interest on the amount used from the overdraft account.
- Further, once you have paid the withdrawn amount, you can again get access to the funds and can instantly withdraw funds as and when you need. Thus, overall bank overdraft helps you to avail funds instantly with a flexible repayment method.
Disadvantages of bank overdraft:
- There are certain drawbacks to using the bank overdrafts. Firstly, to avail the overdraft facility, you must have a bank account with a similar bank plus these overdrafts are mostly secured form of credit and taken against the company’s assets.
- Banks usually renew the credit limit of the overdraft account. Thus, it would help if you negotiated with the bank as you use the overdraft facility as the overdraft is available based on the revenue of the business.
- In case, you exceed the overdraft limit; you may have to pay penalty charges.
- The rate of interest charged on the overdraft account is usually higher.
Thus, bank overdraft can be used by salaried and self-employed professionals to meet short-term financial needs. However, it would be a good idea to use the bank overdrafts in case of emergency of the requirement of funds.
Summary: Overdraft: Advantages and Disadvantages
A bank overdraft is the credit facility provided by banks in which you can withdraw the funds above the account balance when you don’t have sufficient funds in your bank account. It is thus an extension of the monetary limit of your account and the money used is said to be ‘Overdrawn’. The limit of the credit facility is determined based on the bank balance, repayment history and credit score and varies from bank to bank.
Advantages of bank overdraft:
A bank overdraft offers a flexible line of credit as there is no restriction on how you can use the funds through an overdraft facility Also, there is no obligation to use the overdraft facility. You can use the overdraft facility as and when you need it. Banks charge interest on the amount used from the overdraft account.Further, once you have paid the withdrawn amount, you can again get access to the funds and can instantly withdraw funds as and when you need.
Disadvantages of bank overdraft:
To avail the overdraft facility, you must have a bank account with a similar bank plus these overdrafts are mostly secured form of credit and taken against the company’s assets. Banks usually renew the credit limit of the overdraft account based on the revenue of the business.In case, you exceed the overdraft limit; you may have to pay penalty charges.