An overdraft on your business current account is one of the most useful credit tools available to small business owners — and one of the most abused. Used correctly, it bridges short cash flow gaps without disrupting operations. Used carelessly, it becomes revolving debt at 12–18% per annum that quietly drains your margins every quarter.
In 2026, with working capital costs still elevated and most SME borrowers in Tamil Nadu still rebuilding post-GST adjustment, understanding your OD facility properly can be the difference between smart financing and expensive habit.
What an Overdraft Facility Actually Is
A business current account overdraft (OD) gives you the ability to withdraw more than your account balance, up to a pre-approved limit set by your bank. Interest is charged only on the amount you actually use, calculated daily. You're not required to draw the full limit. You're not given a fixed repayment schedule — you repay by depositing into the account.
This is fundamentally different from a term loan, where you receive a lump sum and repay in fixed EMIs. An OD is revolving credit — draw, repay, draw again, within the limit. SBI's CC (Cash Credit) facility for businesses operates on this same principle. HDFC Bank, Axis Bank, and Kotak Mahindra Bank all offer OD products against current account turnover or fixed deposits.
The approved OD limit is typically 20–40% of your average annual turnover for unsecured facilities, or up to 90% of your FD value for secured OD against deposits. Banks review and renew the limit annually — and they can reduce or cancel it during reviews if your turnover drops or account conduct deteriorates.
What It Actually Costs — The Real Numbers
Here's what most bank relationship managers don't spell out clearly. OD interest in 2026 runs between 11% and 16.5% per annum depending on the bank, your relationship, and whether it's secured or unsecured. The Reserve Bank of India's monetary policy sets the repo rate floor, but banks price OD spreads independently — so always compare.
On top of interest, watch for:
- Processing fee: 0.5–1% of the OD limit at setup and on annual renewal
- Non-utilisation charges: Some banks charge 0.25–0.5% per annum on the unused portion of your OD limit
- Penal interest: If you exceed the sanctioned limit even by a day, banks charge an additional 2–3% penal rate on the excess
- Cheque return charges: If an outward payment bounces because your OD is exhausted, you pay ₹500–₹1,500 per instance
Run this against a term business loan at 10–13% with fixed EMIs. For predictable capital expenditure needs, a term loan is almost always cheaper total cost. The OD makes sense when the need is genuinely variable and short-duration.
When an OD Makes Sense vs When It Doesn't
Use an overdraft for: covering the gap between invoice raising and payment receipt (30–60 day debtor cycles), managing salary payouts at month-end when receivables are pending, or bridging a seasonal inventory purchase that you'll recover in 45–60 days.
Don't use an OD for: purchasing equipment, funding long-term working capital without a repayment plan, or subsidising a business that's structurally loss-making. If your OD balance never hits zero — if you're always at 80–100% utilisation — that's a warning sign. The bank will notice, and it signals chronic cash flow stress rather than temporary mismatches.
Chronic OD utilisation also hurts your credit profile. High credit utilisation is as damaging on business credit lines as it is on personal credit cards. Use our business loan eligibility checker to see whether a structured term loan might work better for your actual need before defaulting to the OD.
Getting an OD Limit Increased — or Switched to a Better Structure
If your business has grown and your OD limit feels tight, the annual renewal is your best opportunity to negotiate. Bring 12 months of account statements showing healthy inflows, updated ITRs, and GST returns. Banks look at: average monthly credits, how often the OD is utilised, and whether it's being repaid regularly.
Some businesses eventually graduate from an OD to a formal Cash Credit (CC) limit, which is larger and better structured for manufacturers and traders. Others find that a mortgage loan against property (LAP) gives them a larger limit at lower interest — often 9.5–11% — which they can use as working capital at a far lower cost than an unsecured OD.
Before your next renewal, calculate the actual cost using our business loan ROI calculator. Compare what your OD is actually costing you annually against what a structured loan would cost. The numbers sometimes surprise business owners who've been assuming the OD is 'cheaper because they don't use it fully.'
Frequently Asked Questions
Can I get a business current account OD without property collateral?
Yes — most banks offer unsecured OD limits of ₹5–50 lakh against turnover for businesses with 2+ years of banking history and clean GST returns. Above ₹50 lakh, most lenders want either property collateral or a fixed deposit backing. HDFC and Kotak are currently more flexible on unsecured OD for businesses with strong current account turnover.
How is a business OD different from a CC limit?
An OD is linked to your existing current account and is typically smaller and more relationship-based. A Cash Credit (CC) account is a separate credit facility designed specifically for working capital — it often has a larger limit and requires a formal credit assessment with stock and debtor statements. CC is more appropriate for trading and manufacturing businesses with clear inventory cycles.
Does using an OD affect my CIBIL or business credit score?
Yes — your OD facility is reported to credit bureaus. High utilisation (consistently above 70–80% of your limit) signals stress and can lower your business credit score. On-time repayments and regular credit-debit cycles in the OD account actually help build your credit profile. Contact our loan agents in Udumalpet if you need help structuring your credit facilities before a major loan application.
At Guhan Capitals, we work with business owners across Pollachi and Udumalpet to figure out the right credit mix — OD, term loan, LAP, or a combination. If you want a second opinion on your current setup or need to restructure your working capital, apply for a loan consultation with us and we'll map out what actually makes sense for your business numbers.