How Can a Small Business Benefit from an Overdraft Facility?

Published on 04 June 2024

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Small businesses in India, especially Micro, Small, and Medium Enterprises (MSMEs), play a crucial role in the economy. However, these businesses often face financial challenges that can hinder their growth. One valuable financial tool that can help them overcome these challenges is the overdraft facility (OD). Let's explore how a small business can benefit from an overdraft and make use of the facility to help the business grow.

• Managing Cash Flow: An overdraft lets businesses access funds, as and when required from a pre-determined limit, to cover daily costs, buy supplies, and take advantage of new business opportunities. An overdraft loan allows businesses to access funds quickly to cover the gap between their expenses and income. This helps them keep their operations running smoothly. The quick access to funds helps businesses to quickly bridge the gap between their payables and receivables, ensuring smooth business operations.
• Working Capital Management: Maintaining adequate working capital is crucial for small businesses to meet their short-term financial obligations. An overdraft facility provides them with the necessary liquidity to manage their day-to-day expenses, purchase inventory, and seize business opportunities.

• Flexibility: Unlike regular term loans, where businesses have to repay a fixed amount every month, an overdraft facility offers repayment flexibility. Business owners can withdraw funds as needed and repay the borrowed amount at their convenience, with interest being charged only on the utilized amount, thereby reducing financial strain.
• Seasonal Business Support: Many small businesses experience fluctuations in demand due to seasonal trends. An overdraft facility can give businesses ready access to funds to handle such strenuous times, keeping operations stable when demand is high.
• Business Expansion: Access to additional funds through an overdraft facility can support small businesses in expanding their operations. For example, a small garment manufacturer in India may use an overdraft facility to purchase additional raw materials during the festive season, enabling them to fulfill large orders and capitalize on the increased demand.

Also Read: Understanding Overdraft Facility: A Simple Explanation

• Emergency Funding: Small businesses may encounter unexpected expenses or emergencies that require immediate funding. Having an overdraft facility in place provides them with a safety net, allowing them to address such situations without disrupting their business operations.
• Improve Credit Score: Timely repayment of overdraft amounts can have a positive impact on a business's credit score. This can be beneficial when applying for large loans or credit in the future. Lenders consider the reliability of the business. This information can impact the approval of the loan or credit. It is important for businesses to establish a track record of reliability. A better credit score helps businesses get loans with lower interest rates, saving money on borrowing expenses.

Also Read: What Can You Do To Improve Your Credit Score?

In short, an overdraft facility can assist small businesses in India with managing their finances more effectively. It provides flexibility and access to cash when required. This can be beneficial for businesses that may face unexpected expenses or cash flow challenges. An overdraft can help small businesses in India manage their finances better. Small businesses can use an overdraft facility to borrow money. This can help them with financial issues and take advantage of growth opportunities. It also supports the country's economic development.

Also Read: Is an Overdraft Facility Better Suited for Your Business Than a Term Loan?

Godrej Capital offers Flexi Funds, an overdraft-like facility, along with its loans for businesses such as the unsecured Business Loan, Professional Loan for Chartered Accountants (CAs) and Doctors, and Loan Against Property (LAP) and Udyog LAP in the secured segment. This flexible funding option offers small businesses greater financial control and agility to meet their evolving business needs.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com