Overdraft Mismanagement – The Silent Killer Of Profitable Businesses

Your business might look healthy from the outside with:

• Good orders
• Healthy margins
• Satisfied customers

But sometimes, what breaks your business is not a lack of sales, it’s poor handling of cash. Lakshita runs a distribution firm. Her firm was earning consistent profits of ₹4 to 5 lakh a month.

However, they were heavily dependent on overdraft facilities. Due to delays in payment collections, it defaulted on multiple commitments. Within eight months, her operations came to a halt.

Lakshita’s story is not a rare case. Most of your businesses often overlook the silent pressure that builds due to casual or careless use of overdraft facilities.

Understanding Overdraft Facility

It is a financial tool that allows your business to withdraw more than the balance in its current account. But only up to a certain limit approved by your bank. This facility is helpful for you to manage working capital gaps for a short period.

Common Features:

• Interest will be charged only on the amount you will use, not on the full limit.
  
  
• Your limit can be secured or unsecured. It depends on your bank’s assessment.
  
  
• Your repayment would be flexible, without fixed EMI obligations.
  
  
• It is usually offered to businesses with current accounts and a decent transaction history.

How Overdraft Misuse Can Damage Your Business?

1. Using Overdrafts Like Permanent Capital

Many businesses start depending on the overdraft as if it’s part of their own funds. This is a costly mistake, especially when no plan exists to repay the drawn amount quickly.

2. Neglecting the Interest Burden

Interest on your business overdrafts ranges between 12% and 20% annually. Even a constant usage of yours of ₹8 to ₹10 lakh can result in interest payments of ₹12,000 to ₹16,000 a month.

3. No Set Timeline for Repayment

If you are using overdrafts without a clear recovery or repayment plan then this short-term facility becomes a rolling liability.

4. Overconfidence in Receivables

Businesses often expect customer payments to come in before the interest date. But even if your one large invoice is delayed, then your overdraft will extend and the interest meter keeps ticking.

Real-Life Example

Supriya is a textile wholesaler. She was running ₹25 lakh in monthly sales. She had an overdraft limit of ₹10 lakh. She has a receivables cycle of 45 to 60 days. She regularly used ₹9 lakh from the overdraft to cover:

• Rent
• Logistics
• Raw materials

However, one of her clients delayed payment. So her interest costs rose to ₹15,000 to ₹16,000 a month. Within four months, her suppliers started refusing fresh dispatches due to delayed payments.

Her business went into a downward spiral and finally shut shop in less than a year. 

You can see that over 32% of Supriya’s annual profit was wiped out only due to interest.

Signs That Your Overdraft Is Hurting Your Business

• Always use 80–90% of the limit.
  
  
• Using overdraft funds to pay staff every month.
  
  
• Interest cost becomes a fixed monthly expense.
  
  
• Cash inflow from customers is uncertain or delayed.
  
  
• The bank has reduced or frozen your overdraft facility.

How Can You Manage Overdrafts Sensibly?

When Not To Use Overdraft?

You can use other better options for some types of financial needs.

Comparing Overdraft With Common Credit Tools

Steps To Stay In Control

• You must review your cash flow weekly.
  
  
• You must fix an overdraft exit plan.
  
  
• You must train your finance staff about the cost impact of daily overdraft usage.
  
  
• You should have at least one month’s exit reserves.
  
  
• You must re-negotiate with your bank annually.

Final Thoughts

The overdraft facility is meant to help you during uncertain inflow periods. But if you use it without discipline, it can quietly drain profits and push businesses toward a cash crisis. 

Most business owners like Supriya don’t realise the damage until vendors stop supplying or the bank suspends the limit. You must not treat an overdraft as free cash but should only use it for short periods when necessary.

If your business tracks cash flow regularly and uses overdrafts wisely then it will stay in control, even during rough patches.

FAQs

1. How often should I review my overdraft usage?

At least every week to ensure responsible use and avoid surprises.

2. What is the average overdraft interest rate?

Usually ranges between 12% and 20% per annum.

3. Is an overdraft cheaper than a loan?

Only for very short durations. Long-term use makes it more expensive.

4. Will an overdraft affect your credit score?

Yes, especially if payments are delayed or the limit is breached.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?