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Key Features of Business Loan OD:

Business loans come in different types, catering to various business requirements:

  • Flexible Borrowing: Businesses can withdraw funds as needed within the sanctioned limit.
  • Interest on Utilized Amount: Interest is charged only on the amount used, not on the entire limit.
  • Revolving Credit: The overdraft limit is replenished as repayments are made, making it a continuous credit facility.
  • Collateral-Based or Unsecured: Some overdrafts require collateral, while others are unsecured, depending on the lender and the borrower’s creditworthiness.
  • Short-Term Financing: Typically used for immediate cash flow requirements, such as purchasing inventory, paying salaries, or handling urgent expenses.
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Benefits of Business Loan OD:

  • Maintains Liquidity: Helps businesses maintain smooth operations without cash shortages.
  • Cost-Effective: Since interest is charged only on the utilized amount, it can be cheaper than a term loan.
  • Quick Access to Funds: Once approved, businesses can access funds instantly.
  • Improves Business Credit: Proper usage and timely repayments can enhance a company's creditworthiness.

Eligibility Criteria:

  • Business should have a good credit history and stable financial performance.
  • Some banks require collateral, while others offer unsecured OD facilities based on the business’s turnover and credibility.
  • Business vintage (usually 1-3 years of operation) and minimum turnover criteria may apply.
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How to Apply for a Business Loan OD:

  • Choose a bank or financial institution offering an OD facility.
  • Submit necessary documents such as business financials, KYC, bank statements, and income tax returns.
  • Under go credit assessment and approval process.
  • Once approved, the OD limit is sanctioned and linked to the business account.

Frequently Asked Questions (FAQs)

What is a business loan?
A business loan is a lump sum of money provided by a lender to a business, repaid over a set period with fixed or variable interest rates. It’s typically used for long-term investments like expansion, equipment purchases, or property acquisition. Loans can be secured (requiring collateral) or unsecured.
What is a business overdraft (OD)?
A business overdraft is a line of credit linked to a business bank account, allowing you to withdraw more than the account balance up to an approved limit. It’s designed for short-term cash flow needs, like covering unexpected expenses or seasonal fluctuations. Interest is charged only on the amount used, and repayment is flexible.
How do business loans and overdrafts differ?
Purpose: Loans are for larger, long-term investments; overdrafts are for short-term cash flow gaps.
Repayment: Loans have fixed repayment schedules; overdrafts allow flexible repayments without a set schedule.
Interest: Loans often have lower, fixed rates; overdrafts typically have higher, variable rates.
Amount: Loans offer higher amounts; overdraft limits are usually smaller.
What are the eligibility criteria for a business loan or overdraft?
Business tenure: At least 1–3 years of operation.
Credit history: Good personal and business credit scores.
Financials: Proof of revenue, profit, or cash flow (e.g., bank statements, tax returns).
Account requirements: Overdrafts often require a current account with the lender; loans may not.
Age: Applicants typically need to be 21–65 years old. Some lenders may require collateral for secured loans or overdrafts.
What are the typical interest rates and fees?
Business Loans: Interest rates range from 6% to 20% p.a., depending on the lender, loan type (secured/unsecured), and borrower profile. Fees may include processing fees (1–2%) or prepayment penalties.
Overdrafts: Rates are higher, often 10–24% p.a. (e.g., 14% at My Mudra, 8.05% at Bank of Ireland). Fees include annual facility fees, arrangement fees, or penalties for exceeding limits. Interest is calculated daily on the overdrawn amount.
What are the advantages of a business overdraft?
Flexibility: Access funds as needed and repay when cash flow allows.
Quick setup: Often approved faster than loans, sometimes within hours.
Cost-effective for short-term use: Pay interest only on the amount used.
No collateral for unsecured ODs: Reduces risk to assets.
What are the disadvantages of a business overdraft?
Higher costs: Interest rates and fees are typically higher than loans.
Repayment risk: Banks can demand full repayment at any time.
Limited amounts: Overdraft limits are smaller than loan amounts.
Uncertain costs: Variable rates and fees can make costs hard to predict.
What documents are required to apply?
Identity proof: Passport, Aadhaar, PAN card, or voter ID.
Address proof: Utility bills, lease agreement, or passport.
Business proof: Registration certificate, GST returns, or ITRs.
Financials: Bank statements (3–12 months), profit/loss statements, or balance sheets.
Application form: Duly filled with photographs. Overdrafts may require fewer documents if you’re an existing account holder.
How long does it take to get approved?
Overdrafts: Approvals can be as fast as same-day or within 1–3 days, especially for existing customers or unsecured facilities.
Loans: Approvals typically take 3–10 days, depending on the lender, loan amount, and documentation. Secured loans may take longer due to collateral evaluation.
Can I get an overdraft or loan without collateral?
Yes, unsecured options are available:
Unsecured Overdrafts: Offered by many banks (e.g., Axis Bank’s Quick Overdraft, ICICI’s InstaOD up to ₹25 lakh). Higher interest rates apply due to increased lender risk.
Unsecured Loans: Available for smaller amounts, but require strong credit and financial history.
What happens if I exceed my overdraft limit?
Exceeding the limit results in an unauthorized overdraft, leading to:
Higher interest rates.
Penalty fees.
Potential refusal of payments, impacting business operations.
Possible account default or referral to collections if unpaid.
Can I use an overdraft for long-term financing?
No, overdrafts are not ideal for long-term needs. They’re designed for short-term cash flow management. For long-term financing, business loans are better due to lower interest rates and structured repayments. Using overdrafts long-term can lead to high costs and financial strain.

List of Business Loans OD Banks in India