Should you avail of the start-up overdraft facility? Key factors to consider
29 May, 2025
Synopsis:
An overdraft facility provides businesses the flexibility to borrow funds from a pre-approved loan limit as and when needed.
The interest is charged only on the amount utilised and not on the entire credit limit.
Despite the benefits, it’s essential to use the overdraft limit responsibly to avoid financial strain.
More often than not, start-up businesses find themselves in situations when they need additional funding to support their daily operations. Be it to cover unexpected expenses, delayed invoice payments, or seasonal cash-flow fluctuations, access to appropriate start-up financing avenues becomes essential.
One such avenue is the business overdraft facility, which provides businesses with the flexibility to borrow additional funds as and when needed. Unlike traditional start-up funding options, an overdraft is a short-term credit line that helps cover temporary cash shortages. However, it comes with risks, costs, and eligibility criteria that start-ups must carefully evaluate.
In this blog, you will explore various aspects of a start-up overdraft, including its meaning, benefits, risks, and alternatives. You will also learn the factors you must consider when opting for this facility. Keep reading.
What is an overdraft facility for start-ups?
An overdraft facility for start-ups is a financing option that allows start-ups to withdraw more money than they have in their bank accounts up to a pre-approved limit. This facility acts as a buffer, providing immediate liquidity to cover expenses such as payroll, rent, or inventory purchases.
Unlike a Business Loan, which provides a lump sum, an overdraft is a revolving credit facility that can be used as and when needed. Interest is charged only on the amount utilised, making it a flexible funding option for start-ups dealing with fluctuating cash flows.
Key considerations before opting for a start-up overdraft
Before applying for an overdraft for start-ups, consider the following factors:
Interest rates and charges: The interest rate is one of the most crucial factors to check before applying for the business overdraft facility. The lower the interest rate, the better it is. Additionally, look for charges, such as processing fees, renewal fees, etc.
Repayment terms: Unlike fixed-term loans, overdrafts require careful management, as they must be repaid promptly to avoid excessive interest accumulation. Look for an overdraft facility with flexible repayment terms.
Creditworthiness: Financial institutions assess a start-up’s credit score, cash flow stability, and business performance before approving an overdraft application.
Overdraft limits: Look for an overdraft facility with a higher credit limit. Lenders evaluate multiple factors, such as revenue and banking history, business vintage, etc., while approving business credit for start-ups.
Risk of recall: Banks can withdraw the overdraft facility at their discretion, potentially leaving a start-up without necessary funds in critical times.
While overdrafts offer convenience, they should be used as a short-term start-up financing solution rather than a long-term strategy.
Benefits of overdrafts for start-ups
The small business overdraft facility offers multiple advantages, such as:
Flexibility: Unlike loans with fixed repayment schedules, an overdraft allows you to borrow only what you need and when you need it. The interest is charged only on the amount you utilise and not on the entire credit limit.
Quick access to funds: Overdrafts provide immediate access to funds. You can borrow from a pre-approved credit limit and meet your urgent expenses without waiting for loan approval.
Cash-flow management: Overdraft facilities are a viable option to manage gaps in cash flow for start-ups. You can borrow and repay anytime as per your cash-flow requirements.
Builds business credit: Proper management of an overdraft facility can help businesses build a strong credit history. Subsequently, it improves their eligibility for availing of loans in the future.
Avoid loan application hassles: Availing of a business overdraft facility helps you avoid the hassles of applying for a fresh loan whenever you require financing. Overdrafts typically require less paperwork and fewer formalities than traditional start-up loans.
How to apply for a business overdraft?
Applying for a start-up overdraft involves a straightforward process:
Step 1: Research and compare overdraft offerings from different lenders.
Step 2: Ensure your business fulfils the lender’s eligibility criteria for a small business overdraft.
Step 3: Provide the required documents, such as bank statements, business plans, and proof of financial stability.
Step 4: Once approved, the lender will specify the overdraft limit, interest rate, and repayment terms.
Step 5: Start using the overdraft limit to manage cash flow.
Alternatives to start-up overdrafts
While overdrafts are useful start-up funding options, you can also consider the following alternatives:
Term Loans
Business Credit Cards
Merchant cash advances
Invoice financing
Venture capital or angel investors
Crowdfunding
The start-up overdraft facility can be a lifeline for businesses facing cash flow challenges, offering flexibility and quick access to funds. It helps manage cash-flow gaps by borrowing from a pre-approved credit limit as and when required. However, despite these overdraft benefits, it’s essential to use it responsibly to avoid financial strain. Businesses can also explore alternative start-up financing options that align with their long-term growth strategy.
With HDFC Bank’s Dukandar Overdraft Facility, you can enjoy a credit limit of up to ₹10 lakh and use it to fund your business’s growth and manage working capital needs. You can avail of this facility without pledging any asset as collateral. If you are a GST-registered business, HDFC Bank's Xpress GST Overdraft offers a collateral-free credit limit of up to ₹50 lakh based on your GST returns, enabling fast access to working capital with minimal documentation.
Disclaimer: *Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
