Capital is a part of business that ensures all operations run smoothly. Business owners manage capital differently, wherein they either avoid credit or rely on business financing.
The dropline overdraft facility is like the overdraft facility traditionally offered but there are a few points of distinction.
These are just a few of the numerous secured and unsecured credit options on offer, and they are designed to help you. However, you must do your due diligence as an uncalculated and uninformed credit can negatively impact the business’s growth.
So, understanding what dropline OD is and how you can avail it is a good starting point. Read on to learn more about dropline overdraft, its features, benefits, and more.
Banks, NBFCs, and other financial institutions generally offer the dropline overdraft facility through your current account. You can avail dropline OD as an unsecured as well as secured credit.
With this facility, you can get access to funds over your current account but only up to a certain amount.
The limit is predetermined and gets reduced every month till the end of the tenure. Moreover, the financial institution will levy interest only on the amount you withdraw and not the entire limit.
You can deposit money in your account whenever you want to restore your dropline overdraft limit.
Given below are the top features of availing a dropline overdraft facility:
When you avail dropline OD facility, the financial institution generally pre-sanctions the limit on approval. As a result, you can withdraw funds from it whenever you like, giving you the freedom to meet your financial obligations without any delay.
Interest rates determine the price you will pay to avail a credit. In dropline OD, the interest rate may be on the higher side in some cases. However, financial institutions levy interest only on the utilised amount.
In addition to this, the interest is generally calculated on a daily basis but levied on a monthly basis.
Depending on the financial institution you choose, the repayment tenure of your dropline OD can go up to years. This enables you to comfortably repay the credit, without straining your finances.
Generally, when you avail a business loan or any other credit, you need to repay in monthly instalments. However, in the dropline overdraft facility, you can make repayment as per your convenience.
Financial institutions offer secured and unsecured dropline overdraft facilities, allowing you to choose as per your requirements. In the secured option, you will have to pledge your asset as collateral but not in the unsecured option.
There are numerous financial institutions that offer the facility of dropline overdraft. However, it is essential to choose the best one to ensure that you make a decision that keeps your finances secure.
Some of the top financial institutions offering dropline OD include:
Kotak Mahindra Bank
Aditya Birla Finance
Be sure to check the terms of the financial institution to make a well-rounded decision. Some of the terms you should look at include, maximum limit, interest rate, tenure, processing fee, and other additional costs.
The eligibility criteria for dropline overdraft loan will vary depending on the financial institution. However, there are common entities who can avail this facility, provided they meet the criteria set by the institution.
Some of the entities are:
Private limited companies
It is important to note that entities other than the ones mentioned above may also avail of this facility. You can check your eligibility by visiting the financial institution’s website.
Generally, the eligibility criteria set by the financial institution revolve around the following factors:
Age at the time of availing the facility and at the end of the tenure
Turnover and profitability of the business
Proof of office/ residence
Keep in mind that these eligibility criteria may also change depending on the institution. It is important to check your eligibility before applying, as it can help you enjoy a seamless application process and improve your chances of getting approval.
Like eligibility, the documents required for availing this facility also varies depending on the institution you choose. These requirements may also vary depending on who applies for it (partnership, sole proprietorship, etc.).
Given below is a general overview of documents required for dropline OD for different entities:
Partnership deed, in case of partnership firms
Incorporation certificate, in case of private limited companies
GST returns for the previous year
Bank statement for the account mentioned in balance sheet
Statement of payment for existing loans, if applicable
In addition to the above, you will have to submit the following documents to avail dropline overdraft facility:
Proof of residence
Photographs, even of co-applicants
One of the best ways to determine whether the dropline overdraft facility is the right option is to look at the pros and cons along with your needs. Given below is tabular overview of the advantages and disadvantages of dropline OD:
Access to funding as and when needed
Can result in over reliance as a result of instant funding
Can be secured and unsecured
Risk of asset loss in case of secured OD
Flexibility in repayments, no monthly instalments
Negative impact on creditworthiness in case of default in unsecured OD
Reducing limit, reduces exposure
Can avail this facility only through a current account
Interest levied only on utilised limit
The interest can be higher in some cases
Now that you know what a dropline overdraft loan is, choose your lender after careful assessment. This will help you choose an institution that offers a good credit limit at an affordable cost.
Choose the right financing institution by assessing their reputation, interest rate, maximum limit, and tenure. These factors can help you determine how safe, secure, and affordable the credit is. This, in turn, keeps your finances intact allowing you to grow your business seamlessly.
The main benefit of this facility is that you get immediate access to funding, within the stipulated limit. Additionally, since the lending levies interest only on the utilised amount, it can become a cost-effective option.
The best way to decide between a credit facility and liquidating an investment is to look at the cost. You can do this by checking the interest you receive on your investment and the interest you would pay on the credit.
If what you are paying is less than what you earn, availing credit would be a better option than liquidating your investment. Be sure to consider the processing fees, penalties, and other charges associated with both the options.
Generally speaking, maintaining your credit score is a good way of proving that you can handle credit responsibly and repay it on time. So, yes, you should maintain your credit score.
Collateral requirements depend on the financial institution you choose and the type of facility you choose. If you choose an unsecured dropline overdraft, you will not need to pledge an asset as collateral. If you choose secured, you will have to pledge a collateral. You can check this on the lender page before applying for it.
The maximum limit for this facility varies depending on the financial institution you choose and your creditworthiness.
A main point of distinction between these two facilities is that in dropline OD, the limit reduces every month. Whereas it stays the same for a regular overdraft facility.
The interest rate for this facility depends on the lender and your creditworthiness. However, interest gets levied only on the amount you withdraw.