If you run a small business — a shop, a trading firm, a clinic, a manufacturing unit — there will be months where cash goes out before it comes in. You've paid your suppliers. Your customers haven't paid you yet. You need ₹3–5 lakh to bridge the gap for 15–20 days. This is exactly what an overdraft facility on your business current account is built for.
Most business owners either don't know this product exists or confuse it with a term loan. It's neither complicated nor expensive when used correctly. Let me explain how it actually works.
What Is a Business Current Account Overdraft?
An overdraft (OD) is a pre-approved credit limit attached to your current account. Your account balance can go negative — up to the sanctioned limit — and you only pay interest on the amount you actually use, for the days you actually use it. No EMIs. No fixed repayment schedule. You deposit funds when they arrive, the balance moves back up, and your interest cost drops immediately.
Compare that to a term loan: you borrow ₹5 lakh, pay EMI every month for 3 years, and pay interest on the full outstanding balance whether you've used the money or not. For short-term working capital needs, an OD is almost always cheaper and more flexible.
Banks like SBI, HDFC, ICICI, and Axis Bank all offer current account OD facilities. Limits typically range from ₹2 lakh to ₹50 lakh for small businesses, depending on your turnover, banking history, and collateral — if any is offered.
How Banks Decide Your Overdraft Limit in 2026
Here's what most applicants miss: banks look at your current account transaction history more than your ITR when assessing an OD limit. If your account shows healthy inflows and outflows consistently over 12–24 months, many banks will offer an unsecured OD up to ₹5–10 lakh without any collateral.
For larger limits — typically above ₹10 lakh — you'll likely need to back it with either a fixed deposit, property, or a mortgage. The interest rate on secured ODs runs between 9.5% to 11.5% annually in 2026. Unsecured ODs are higher, typically 13–16%, but the flexibility often justifies the cost for short-cycle use.
Key factors banks evaluate:
- Average monthly balance in your current account (last 12 months)
- Monthly credit turnover — total inflows into the account
- GST filing history and declared turnover
- ITR for the last 2 years (for higher limits)
- Existing loans and your CIBIL or CRIF score
Check your business loan eligibility to see where you stand before approaching a bank. It saves time and avoids unnecessary credit enquiries on your report.
OD vs Term Loan vs Credit Card: Which Works for Your Business?
Let me be direct about this comparison. A term loan makes sense when you're buying machinery, expanding premises, or making a capital investment with a predictable payback period. An OD makes sense for working capital gaps — paying staff, buying stock, bridging payment cycles. A business credit card is useful for small recurring expenses but carries high interest (24–36%) if you revolve the balance.
Here's a quick example. Your textile business buys fabric worth ₹8 lakh in the first week of the month. Customers pay you in 45 days. You use your OD for 30 days at 11% per annum. Interest cost: ₹8,00,000 × 11% ÷ 12 = roughly ₹7,333 for one month. That's your cost of doing business — and it's predictable, controllable, and far cheaper than late payment penalties to suppliers or losing a deal because of a cash gap.
Use our business loan ROI calculator to see whether the cost of borrowing actually makes sense against your expected return on the transaction.
The Reserve Bank of India has issued guidelines on fair lending practices for working capital facilities — it's useful to know that banks are required to be transparent about the interest calculation method on overdraft accounts.
Common Mistakes Business Owners Make With OD Facilities
The biggest mistake: treating the OD as permanent capital. Some business owners max out their overdraft and never repay it, effectively converting a flexible credit line into an expensive long-term loan. Banks notice this. When your OD is continuously fully drawn for months, the bank may reduce your limit at renewal or ask you to convert it to a term loan.
Second mistake: not reviewing the limit annually. If your business has grown — more turnover, more GST filings, better banking behaviour — you can and should ask for a higher limit. Many business owners are sitting on a ₹5 lakh OD when they qualify for ₹20 lakh. Talk to a DSA or your relationship manager about a limit enhancement review.
If you're in Pollachi or Udumalpet and want help structuring the right working capital solution for your business, our loan agents in Pollachi work with all major banks and can match you to the right product and lender for your turnover profile. Also check our full guide on loan document checklist so your application doesn't get delayed for missing paperwork.
Frequently Asked Questions
Can I get a business overdraft without collateral in 2026?
Yes. Most banks offer unsecured OD limits up to ₹5–10 lakh based on your current account transaction history and GST turnover. Above that, they usually ask for an FD or property as security. Rates are higher on unsecured ODs — typically 13–16% — but no asset is at risk.
Does using an overdraft affect my CIBIL score?
An overdraft is a credit facility and will appear on your CIBIL or CRIF report. Using it regularly and repaying it within the sanctioned limit actually improves your credit profile. The problem arises only if you exceed the limit or the account becomes irregular. Disciplined OD usage is a positive credit signal.
How is overdraft interest calculated?
Interest is calculated daily on the outstanding negative balance and debited monthly. If you borrow ₹5 lakh for 10 days at 12% per annum, you pay ₹5,00,000 × 12% ÷ 365 × 10 = roughly ₹1,644. You're not paying for the full month. This daily calculation is what makes ODs cost-effective for short-duration gaps.
Ready to explore working capital options for your business? Apply for a loan through Guhan Capitals and we'll identify whether an OD, a term loan, or a cash credit facility is the right fit — and get you the best available rate from banks operating in your area.