{"id":6438,"date":"2022-06-29T11:48:36","date_gmt":"2022-06-29T06:18:36","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=6438"},"modified":"2025-01-07T12:33:28","modified_gmt":"2025-01-07T07:03:28","slug":"overdraft-explained-business-banking","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/","title":{"rendered":"Overdraft: a Quick Guide for Businesses"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Overdraft, commonly abbreviated as OD in banking terms, is one of the key features of current accounts. <\/span><span style=\"font-weight: 400;\">It is a short-term extension of credit that businesses can access without having to go through the tedious process of applying for a loan.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Whether it be taking care of short-term financial commitments when cash flows are tight, paying employees on time, or meeting working capital requirements, <a href=\"https:\/\/razorpay.com\/learn\/features-of-current-accounts-for-business\/\">this feature of current accounts<\/a> bails businesses out of many a tight spot.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here\u2019s a quick primer for those less familiar with OD. Read on!<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69e7ab4a031e4\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69e7ab4a031e4\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#What-is-overdraft-OD\" >What is overdraft (OD)?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#How-does-it-work\" >How does it work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#An-illustration\" >An illustration<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#Benefits-of-availing-OD-for-businesses\" >Benefits of availing OD for businesses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#Disadvantages-of-OD-for-businesses\" >Disadvantages of OD for businesses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#The-takeaway\" >The takeaway<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/overdraft-explained-business-banking\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-overdraft-OD\"><\/span><span style=\"font-weight: 400;\">What is overdraft (OD)?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Overdraft is a bank facility that lets the account holder withdraw money from their bank account even if they don\u2019t have a sufficient balance. Even when your bank balance is nil, if you have a current account with an OD facility, your financial institution will grant you extended credit up to a limit for a small fee.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Depending on several metrics like credit score, repayment history, and how your relationship with the bank is, you will be assigned an overdraft limit. You can withdraw funds only till the assigned limit. Your bank will be able to provide you with this facility based on <a href=\"https:\/\/www.rbi.org.in\/scripts\/FS_Notification.aspx?Id=12293&amp;fn=2&amp;Mode=0#S7\" target=\"_blank\" rel=\"noopener\">the guidelines put forth by RBI.<\/a><\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, if the bank assigns your OD account a limit of Rs 50,000, you can only withdraw a maximum of Rs 50,000 after your bank balance reaches zero.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The interest rate levied on the OD facility differs from bank to bank. However, account holders are required to repay the amount to the bank within a predetermined time which is usually less than 12 months.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Note that the facility is available in both savings and current accounts offered by banks and financial institutions in India. However, it may not be as common for savings accounts as it is for <\/span><a href=\"https:\/\/razorpay.com\/x\/current-accounts\/\"><span style=\"font-weight: 400;\">current accounts<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_overdraft&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Get Started<\/a><\/div>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-does-it-work\"><\/span><span style=\"font-weight: 400;\">How does it work?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The importance of business continuity and keeping the business cycle running has never been as much in the light as it is today &#8211; in the post-pandemic era, as life is getting back to normal.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is where the overdraft facility comes in handy for small businesses.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One could say that the OD facility works like a credit card. You dip into the excess funds available to you (but to a specific limit), whenever you require, and you pay interest on the amount you used up. The interest you pay is based on your credit history and your rapport with the financial institution, among other factors.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The only difference between a credit card and an overdraft is that for the latter, you pay interest on the amount you overdraw irrespective of the repayment timeline. This is unlike the case of credit cards, where you can avoid paying interest if you pay your credit card bills on time and in line with the agreement you have with your credit card provider.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"An-illustration\"><\/span><span style=\"font-weight: 400;\">An illustration<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Let&#8217;s look at it through an illustration to help you understand this better. Suppose you are a small business owner with Rs 50,000 as your account balance. There is an urgent payment that you need to make to your raw material supplier for Rs 80,000. You know there is some money coming your way from your customers, but this payment cannot wait.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this situation, taking on a business loan does not make any sense because of all the paperwork involved and the time the financial institution will take to process the loan. Instead, it makes sense to overdraw.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Once the facility is activated, Rs 50,000 will be debited from your account, and the remaining Rs 30,000 will be paid to the vendor from the overdrawn amount, of course, depending on the permissible limits available to you as the business owner.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You may make this payment any way you want &#8211; through <a href=\"https:\/\/razorpay.com\/learn\/what-is-cheque\/\">cheque<\/a>, online transfers, or a debit card. Once sanctioned, it is essentially your money, that you can access anytime and any way to meet your short-term requirements.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You will be charged interest on the overdraft loan, i.e, on Rs 30,000, as soon as the amount is used. You will then have to repay your bank within the time specified.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Benefits-of-availing-OD-for-businesses\"><\/span><span style=\"font-weight: 400;\">Benefits of availing OD for businesses<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Here\u2019s how OD could be a blessing for your business:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You only borrow a specific amount of money the business requires immediately and interest is charged only on the amount utilized.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It lets you withdraw funds via multiple modes &#8211; from cheques to ATMs, through online modes and even by debit card.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It allows you to manage cash flow in the business without having to take on a business loan. So, you can avoid the hassle of paperwork, and loan processing woes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Very quickly available for use, there is generally no charge on paying the amount back at the earliest. With loans, you may have to pay a foreclosure amount.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">One of the foremost advantages of the facility is that there is no collateral sought.<\/span><\/li>\n<\/ol>\n<h2><span class=\"ez-toc-section\" id=\"Disadvantages-of-OD-for-businesses\"><\/span><span style=\"font-weight: 400;\">Disadvantages of OD for businesses<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">As with any feature of modern banking, OD is not without its shortcomings.\u00a0<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You can only get a limited amount of funds through the facility.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If you require more funds than your sanctioned limit, you will have to pay an extra arrangement fee.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While the interest on a loan is charged monthly, the interest on OD is charged <\/span><b>daily<\/b><span style=\"font-weight: 400;\">. The interest can also be slightly higher than conventional borrowing instruments.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The sanctioned limit depends on your current financials which may restrict your access to excess funds.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Remember that these are short-term borrowings for which interest rates may be revised every year by the bank.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Regular overdrawing puts a dent in your credit score by acting as evidence of irresponsible financial management, poor business strength, or the inability to manage debtors.<\/span><\/li>\n<\/ol>\n<h2><span class=\"ez-toc-section\" id=\"The-takeaway\"><\/span><span style=\"font-weight: 400;\">The takeaway<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">OD is a benefit to businesses and individuals in more ways than one. Apart from allowing you to circumvent loan processing, you don\u2019t have to set down collateral every time you have a short-term cash crunch.<\/span><\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/?r=blog_cta_business_banking_overdraft&amp;utm_source=blog&amp;utm_medium=cta\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Get Started<\/a><\/div>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span><span style=\"font-weight: 400;\">FAQs<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>Overdraft, commonly abbreviated as OD in banking terms, is one of the key features of current accounts. Read on to learn more!<\/p>\n","protected":false},"author":151156470,"featured_media":6439,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[3581,3475],"class_list":{"0":"post-6438","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"tag-business-banking","9":"tag-current-account"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/6438","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156470"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=6438"}],"version-history":[{"count":4,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/6438\/revisions"}],"predecessor-version":[{"id":15328,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/6438\/revisions\/15328"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/6439"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=6438"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=6438"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=6438"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}