Every business understands the significance of having easy access to finances. Irrespective of the size of the business, liquidity crunch in the business world is something every businessperson would have confronted and familiar with. Business owners usually depend upon business loans and personal loans with high interest rates to meet short-term finance requirements. An overdraft facility extends a helping hand to those who have current accounts with good transactions. Dropline overdraft facility is a relatively new product line aimed at businesspersons to help them meet their irregular funding requirements. You may need to understand the product and its eligibility criteria first before deciding to opt for it.
Understanding dropline overdrafts
An overdraft means drawing excess funds from your bank account, just like a short-term loan. With a business overdraft, you can withdraw money from your current account up to a certain pre-determined limit. This money can be used for various business requirements like working capital or business expansion and you need to pay an interest on the extra funds used. The interest rate on an overdraft is linked to the base lending rate of the bank. Dropline overdraft is a step ahead of this facility and combines the features of term loans and overdraft facility. In other words, they are long-term overdraft loans that can be extended for a period of upto 15 years. Unlike traditional overdrafts, they do not have a yearly renewal charge—only a one-time processing fee, like a term loan. Banks offer dropline overdrafts after taking a collateral security such as residential or commercial property.
Eligibility criteria for Dropline Overdraft
Any person owning a residential or commercial property, and a current account with good transaction history with the bank is eligible for an overdraft. Banks have their own eligibility criteria for approving dropline overdraft. These criteria primarily cover the number of years the business has been operational and the time limit for having a current account. On an average, banks require a minimum of three years in business and a clean track record. Banks also seek income-tax returns of the business along with the audited balance sheet and profit & loss accounts to facilitate the overdraft limit.
Advantages of Dropline Overdraft
The dropline overdraft comes with quite a few advantages:
- There are no monthly repayments required as for traditional term loans.
- The interest is charged only on the utilized amount. The interest rate is calculated at the end of the day and debited at the month end as per the closing balance.