A Bank Overdraft is a financial facility offered by banks in India that allows an individual or business to withdraw more money from their current or overdraft account than the actual available balance, up to an approved limit. It is essentially a short-term credit arrangement where the bank covers the excess withdrawal, charging interest only on the overdrawn amount for the duration it remains unpaid.
In the Indian business context, a bank overdraft is widely used by small businesses and startups to manage temporary cash flow mismatches, meet urgent working capital needs, or bridge gaps in receivables and payments. Unlike traditional loans, it offers flexibility as the borrower is not required to repay in fixed EMIs, and can deposit money anytime to reduce the outstanding overdraft.
Banks typically sanction the overdraft limit based on the creditworthiness, financial history, or collateral provided by the applicant—commonly against fixed deposits, property, or business receivables. Interest rates are generally higher than term loans, and banks may also charge processing or renewal fees annually.
From a compliance and filing perspective, businesses using a bank overdraft should reflect it under current liabilities in their financial statements. Regular reconciliation and proper documentation of overdraft transactions are essential, especially during audits or when applying for other credit facilities.
Understanding the Bank Overdraft facility is crucial for financial planning and cash management in small businesses. For a detailed understanding, you can explore the complete concept of a Bank Overdraft and how it impacts your business finances.