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What is Over Draft ?

An overdraft facility is a formal arrangement with a bank that allows an account holder to draw on funds in excess of the amount on deposit. This type of financing is most commonly used by businesses as a way of making their working capital more flexible, although it can also be available to individuals. Banks that offer this service typically have a number of expectations from customers who use it, and it is important for customers to be aware of these expectations before entering an agreement.

The idea behind overdraft facility agreements is that sometimes one needs a bit more money than is available on deposit to deal with various expenses. For example, a business that is always slow in March and April might need help to make payroll and keep current with all accounts and creditors. Another business might need to make a big one-time expense that exceeds the funds on deposit.

With an overdraft agreement, the company can repay the funds at its convenience. The bank may charge an overdraft fee for accessing the money, however, and the interest rate can be higher than that for other types of loans. The bank also has the right to demand repayment in full. Balancing an overdraft facility wisely can free up capital and make people more stable financially, but unwise use can lead people into a spiral of debt that may be difficult to escape.

How to go about it?

The process is similar to taking any other loan. You can offer your bank a host of collaterals, such as your house, shares, bonds, insurance policies, fixed deposits and obtain such overdraft facility. But each one of these has their own upsides and downside. For example, taking an overdraft against property though allows you a larger line of credit as compared to a fixed deposit in absolute terms, property evaluation will take some time. However, the bank will be much quicker while sanctioning overdraft against fixed deposits.

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