A limit on a current account
The account may go negative up to an approved amount, and back into credit as money comes in.
Business & working capital · Loan guidance
Overdraft, explained.
A limit on a current account you can dip into as needed and clear as money comes in.
What it is
The instrument, in plain terms.
A credit limit attached to a current account, allowing the balance to go negative up to an approved amount, with interest charged on the amount and time actually used.
It can suit
- Businesses with fluctuating cash needs and reasonably steady inflows.
- Those wanting flexible access rather than fixed instalments.
- Borrowers who can clear the usage regularly rather than stay drawn.
It may not suit
- Businesses without stable inflows to bring the account back to credit.
- Needs that are really long-term and should be a term loan instead.
The lender’s view
How a lender reads this.
Account conduct
Turnover and how the account has been run previously are read closely.
Security or collateral
Larger limits are usually backed by security or a lien on deposits.
Income visibility
Regular, explainable inflows are what make an overdraft safe to lend against.
Purpose
The lender wants to see what the limit is for, and that it is cyclical rather than structural.
Lenders decide on their own assessment. Our work is to make your case complete, consistent and genuinely ready to be read.
Our work
What we prepare with you.
A realistic limit sized to actual peaks, not to optimism.
A clear grasp of interest charged on usage and for how long.
A routine that clears the overdraft when inflows arrive.
Renewal dates marked, with documents ready before they are due.
Preparation
What a lender usually asks for.
- Current-account statements showing turnover and conduct.
- Audited financials, income-tax returns and GST returns.
- Details of existing facilities and the purpose of the limit.
- Security or deposit documents, where a lien is required.
- Identity, address and guarantee documents as applicable.
- A note on the inflows that will clear the limit.
Mechanics
How it is usually structured.
The shape a lender will typically put around this facility.
Interest on usage
Charged on the amount and the duration drawn, so a swift settlement costs less.
Security
Larger limits are backed by a lien on deposits or other security.
Common mistakes
Where borrowers go wrong.
None of these are exotic. They are the ordinary errors that turn a workable requirement into a difficult application.
Treating a limit as permanent capital
Continuous borrowing means continuous interest and a facility that never truly closes.
Staying drawn out of habit
An account that never returns to credit becomes harder to renew each year.
Ignoring renewal
A lapsed overdraft can freeze the working capital the business relies on.
The full cost
What it costs, beyond the rate.
- Interest on usage
- Charged on the drawn amount; staying drawn is the main cost.
- Renewal charges
- Payable at each periodic review of the limit.
- Lien or deposit
- Funds locked as security become unavailable for operations — an opportunity cost.
- Non-renewal
- A lapsed limit can freeze working capital exactly when it is needed most.
Language
Terms worth knowing.
- Limit
- The maximum the account may go negative under the facility.
- Interest on usage
- Charged on the amount and duration drawn, not on the whole limit.
- Lien
- A right over a deposit or asset held as security for the facility.
On rates
Why we don’t publish a single rate.
Pricing is set by each lender, not by us. Two borrowers approaching the same lender on the same day can be offered different rates, because the number reflects both the facility and the person behind it.
What moves the rate you are offered:
- Your credit record and how past borrowing has been serviced.
- The security offered, and how readily it could be realised.
- The tenure and the structure of the facility.
- Your income or business profile, and how well it is documented.
- The lender’s own cost of funds and internal policy.
- Fees, insurance and margin that belong in the all-in cost, not the headline.
A single advertised rate would misrepresent all of that. What we do instead is help you compare the whole cost, and understand what is actually negotiable in your case.
Questions borrowers ask
How is this different from a cash credit?
- Both are limits. Cash credit is drawn against stock and debtors; an overdraft is usually a plain limit on the account, often against a deposit or security.
Should I clear it every month?
- Returning the account to credit regularly keeps the facility healthy and reduces interest.
Is an overdraft long-term funding?
- No. It suits cyclical gaps. A persistent balance usually means a term loan is the right instrument.
Adjacent borrowing
Related options.
Borrowers considering overdraft often weigh these alongside it.
Cash credit
A running working-capital limit drawn against stock and receivables, renewed periodically.
↗Business loan
Funding for a running business, read from turnover, banking and vintage rather than from a single asset.
↗Personal loan
Unsecured borrowing — no collateral, decided largely on income and credit history, and priced for that risk.
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The Loan CA prepares and advises; it does not lend and cannot promise an approval. Every credit decision rests with the lender, subject to their assessment, documentation and applicable terms. The Loan CA is not licensed, registered or regulated by the Reserve Bank of India, and is not approved, endorsed by, or affiliated with the RBI or the Institute of Chartered Accountants of India (ICAI). Full disclosures →