Global payments
Posted on Jan 8, 2026
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Running a business rarely feels “steady” when it comes to money.
One week you're pursuing a past-due client invoice, and the following week you need money immediately to pay salaries, maintain daily operations or replenish inventory. To close these temporary gaps, more companies are depending on bank credit facilities.
The figures recently from India clearly highlight a shift toward priority sectors, including agriculture, MSMEs, and social infrastructure. Credit flow has sharply risen, from ₹23 lakh crore in 2019 to ₹42.7 lakh crore in 2024.
This is where an OD (Overdraft) come in. It’s designed to help when your timing is off, like expenses today, payments tomorrow.
But what exactly does Overdraft mean in banking, and how does it work? Let’s find out!
Key Takeaways :
Overdraft(OD):
A revolving credit facility that allows you to withdraw more than your available balance, up to a bank-approved limit.Pay interest only on what you use:
Charges apply only to the amount you actually overdraw, not the full sanctioned limit.Built for business cash-flow gaps:
Offers flexibility, such as easy repayment terms and continuity during shortfalls, and often comes with renewal options.
What is OD in banking?
OD stands for Overdraft.
In simple terms, it works like a pre-approved backup fund provided by a bank, letting you withdraw or spend more than the money in your account.
An Overdraft permits you to keep making payments even if your current account balance is zero, up to a predetermined cap established by the bank. For example, you can use up to ₹5.5 lakh to maintain your business if you have ₹50,000 in the account and your overdraft limit is ₹5 lakh.
The flexibility of OD is what makes it beneficial. Interest is only assessed on the amount you actually spend, not the entire bank-approved limit. Because of this, overdrafts are particularly useful for companies that experience irregular payment cycles or seasonal slowdowns.
How does an Overdraft facility in banking work?
Banks don’t hand out an Overdraft limit randomly. They usually determine your overdraft limit based on factors such as your business profile, past cash flow, banking history, and overall creditworthiness.
The OD operates in the background without requiring additional steps each time you use it, since it is linked to your current account once approved.
Here’s what the flow typically looks like:
Set up Account:
The bank reviews your financials and then sanctions an overdraft limit. Depending on your business size and relationship with the bank, this could range from ₹1 lakh to much higher.Automatic activation:
The overdraft immediately makes up the difference if you make a payment that exceeds your available balance. You don't have to apply for a new loan every time.Interest calculation:
Interest is typically computed every day and is only applied to the amount you actually dip into.
For example, if you use ₹2 lakh out of a ₹10 lakh limit for 15 days, you pay interest only on ₹2 lakh for those 15 days.Flexible repayment:
You can repay whenever you want. As soon as money comes into your account, it first goes toward clearing the overdraft balance, so your interest costs start dropping immediately.Renewal process:
Overdraft limits are mostly renewed annually. Some banks also auto-renew it if your account activity and repayment history look healthy.
What are the types of Overdraft facilities in banking?
Various OD facilities are offered by the bank, based on the types of overdraft facilities to match various business needs and risk profiles.
Here's how they differ across some key factors:
Type | Collateral Required | Interest Rate | Approval Time | Typical Limit |
Secured Overdraft | Yes (FD, Property) | 12-15% | 7-15 days | Higher |
Unsecured Overdraft | No | 15-22% | 15-30 days | Lower |
Salary-based Overdraft | No | 14-18% | 3-7 days | 2-3x monthly salary |
Business Overdraft | Varies | 13-20% | 10-20 days | Based on turnover |
1) Secured overdraft
A secured Overdraft is backed by collateral, like a fixed deposit, property, or other assets.
Since the bank has security, it usually gives you a higher limit and better interest rates.
For Example, if you pledge an FD of ₹10 lakh, the bank may sanction an OD limit of around ₹8–9 lakh at relatively competitive rates.
Best suited for: Established businesses with assets and a longer banking relationship.
2) Unsecured overdraft
An unsecured OD doesn’t need any collateral; the bank relies on your credit score, turnover, cash flow stability, and repayment history.
Here, the bank is taking on greater risk, limits are often smaller, and rates are generally higher than for secured overdraft.
Typically offered to businesses with steady monthly transactions and a clean repayment history.
The common limit range is roughly ₹1–50 lakh, depending on the business profile.
3) Salary-based overdraft
This type is available to salary account holders, with the limit linked to monthly income.
These are usually smaller overdrafts, intended primarily for personal use or very small-scale business use.
Example: If your salary is ₹1 lakh/month, the bank might offer an overdraft limit of ₹2–3 lakh.
Interest rates are usually competitive since salary accounts indicate stable income.
4) Business overdraft
A business overdraft is designed specifically for current accounts. Banks assess factors such as your cash flow, GST returns, operational patterns, and working capital needs.
These ODs often include additional features, such as sweep-in options and more flexible renewal terms.
Built for larger operational requirements and uneven business cycles
Limits and repayments can be structured around how your business earns and spends.
What are the benefits of overdraft facilities?
An overdraft is popular with businesses because it solves a very specific problem, like you need money today, but your incoming payment is still a few days away.
When used wisely, it can keep working capital flowing smoothly without adding the pressure of a traditional loan.
Here are the main advantages:
Instant access when needed: Once your overdraft is active, you don’t have to go through approvals again. If your balance goes below zero, the funds are available immediately.
Interest is charged only on what you use: Unlike a term loan, where interest applies to the full amount, overdraft interest applies only to the amount you’ve actually utilised.
Repay whenever you want: There are no fixed EMIs. You can repay partially or fully at any time, and once you repay, the interest is reduced right away.
Keeps the business running smoothly: Helps cover gaps so supplier payments, salaries, rent, or daily expenses don’t get delayed.
Renewal is usually straightforward: Most overdrafts are renewed annually based on account usage and performance, so you can continue using the facility as working capital.
Easy to use across channels: You can access OD funds through cheques, online transfers, or debit cards, depending on what your business needs.
What is the difference between an OD and a personal loan?
A lot of business owners get stuck between these two because both “solve” funding problems, but in very different ways. The right pick usually comes down to how your cash flow behaves and what you need the money for.
Factor | Overdraft (OD) | Personal Loan |
Usage | Pay interest only on the amount used | Pay interest on the full loan amount |
Repayment | Flexible, no fixed schedule | Fixed EMIs over the loan tenure |
Access | Continuous access up to the limit | Lump sum disbursement |
Interest Rate | Typically higher (12-22%) | Usually lower (10-18%) |
Processing Time | Faster once approved | Longer processing time |
Purpose | Short-term working capital | Long-term financial needs |
It really comes down to how your business earns and spends. If your income isn’t consistent or you experience seasonal periods, an overdraft usually works better.
A personal loan is a better fit when you need a clear, fixed amount for a planned expense, such as buying equipment, renovating your workspace, or funding expansion.
Since repayments are structured as predictable EMIs over a defined tenure, it works well if you prefer stability and a set repayment timeline.
What are the fees and interest rates for overdrafts?
OD charges differ across banks, but the pricing structure is usually quite similar.
Secured overdrafts come with lower rates, usually around 12% to 18% per year,
Unsecured overdrafts are priced higher, usually in 15% to 22% per year range.
Your final rate depends on your credit profile, the strength of your banking relationship, and overall market conditions.
Interest on an Overdraft is usually calculated daily on the amount you’ve actually used (the outstanding overdraft), not on the sanctioned limit.
Apart from interest, banks may also apply additional charges such as:
Processing fees: typically ₹1,000 to ₹10,000
Annual maintenance/renewal charges
Documentation fee
Penalties for going beyond the approved limit or missing renewal/compliance requirements
Even if Overdraft rates look higher than a term loan at first glance, it can still be cost-effective for short-term needs because you’re paying only for the amount used, for the time you use it, rather than taking a larger loan you don’t fully need.
Conclusion
When you have short-term cash shortages, especially when client payments are delayed, an overdraft can be a useful backup.
You can use OD more prudently as part of your working-capital plan if you understand how it operates, the types available, and the associated costs.
The true objective is to reduce your reliance on credit as your business expands, particularly with foreign clients, by enhancing collections through quicker payouts, predictable schedules, and clear charges.
Infinity facilitates the smooth and predictable receipt of foreign payments by Indian startups, small enterprises, and freelancers, which facilitates cash flow and planning.
Ready to simplify global payments? Signup now!
FAQs on OD banking
What is OD in banking?
AOD (Overdraft) is a bank-approved credit facility that lets you withdraw more than your account balance up to a limit.
How does OD in banking work for a current account?
When your balance falls short, the bank covers payments using your OD limit, and you repay when funds come in.
What are the types of OD facilities?
Usual categories comprise secured OD, unsecured OD, salary OD, and business OD.
Is OD better than a business loan?
OD is better for short-term cash gaps, while a loan suits planned expenses with fixed repayments
Do we have to pay interest on the full OD limit?
No, interest is charged only on the amount you actually use.
Can OD be renewed every year?
Yes, most OD facilities are renewed annually based on account performance and documentation.
What happens if I don’t repay my overdraft on time?
You may pay higher interest/penalties, and it can impact your credit profile and renewal eligibility
