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An overdraft is an extension of credit from a lending institution when an account reaches zero. ... Basically, overdraft means that the bank allows customers to borrow a set amount of money.
An overdraft facility allows you to write cheques or withdraw cash from your current account up to the overdraft limit approved. It is a short and long term (usually up to 12 months) standby credit facility which is usually renewable on a yearly basis. It is repayable on demand by the bank at any time.
Authorised overdrafts are pre-agreed and allow you to go overdrawn (or borrow) up to a certain limit, normally at a set rate of interest. The way overdrafts are charged is changing: some banks may charge a monthly or a daily usage fee, which may be instead of interest or in addition to interest.
Over draft financing forms a major part of the day to day activities of a finance manager. It is a very crucial activity and requires continuous attention because over draft is the money which keeps the day to day business operations smooth. Without appropriate and sufficient working capital financing, a firm may get into troubles. Insufficient working capital may result in non-payment of certain dues on time. Inappropriate mode of financing would result in loss of interest which directly hits the profits of the firm.
Over draft loan which is also called a working Capital are widely used external sources of finance for availing short term borrowing at some cost. Cash credit is used by businesses to manage working capital requirements