The Capital is the blood of a business. Capital is crucial for the growth as well as the survival of a business. Sometimes, businesses may run short on working capital. So, banks offer a facility called overdraft, where one can withdraw excess money from the bank to complete a
transaction even if there isn’t enough money in his/her account. A Dropline overdraft is almost similar to the traditional overdraft facility with a few added benefits.

By the end of this article, you will understand:

What exactly is a Dropline overdraft?
How does dropline overdraft work?
What are its features?
What are the documents required for a Dropline OD?
The difference between a dropline overdraft and a traditional overdraft

Thereby concluding whether it’s the right choice for your business!

What is Dropline Overdraft?

A Dropline overdraft is a facility provided by the banks, which combines the benefits of both overdraft and term loan. It allows you to overdraw funds from your current account up to an agreed limit set by the bank. However, in dropline OD the withdrawal limit reduces every
month from the sanctioned limit. The interest is paid only for the amount withdrawn and not on the entire withdrawal limit.

The main advantage of Dropline OD over the traditional overdraft is that it doesn’t require a yearly renewal charge. It’s more like a term loan where you pay a fixed one-time processing fee.

How does Dropline Overdraft Work?

Let’s understand the working of dropline overdraft with an example:

Suppose you have a dropline OD facility for 20 months. The sanctioned overdraft amount is Rs. 1,00,000. As we discussed above, in dropline OD, the withdrawal limit will be reduced every month.

Then the operating limit will be automatically lowered by 100000/20 = Rs.5000 after one month.

So, after one month your overdraft limit will be Rs. 95,000. (1,00,000 – 5,000) This monthly computation will continue until the end of the repayment term. This is a simple calculation of Dropline OD

Features of Dropline Overdraft

The following are the main features of Dropline OD:

Secured and Unsecured loans: It is available as both secured and unsecured loans. However, unsecured dropline ODs are only given to businesses with strong financial backgrounds.
Interest: The interest is calculated on the daily basis of withdrawal, and charged monthly.
Overdraft tenure: Generally, the overdraft tenure will be between 1 to 15 years. It may vary according to the bank.
Eligibility: The Dropline OD facility is open to entrepreneurs, proprietors, self-employed professionals, private companies, and partnership firms.
Renewal charge: Unlike overdraft, it doesn’t require a yearly renewal charge.
Overdraft Limit: The maximum amount you can get from a dropline overdraft is up to 15 crores. It will differ from bank to bank.

Documents Required

Along with the duly filled application form you need to submit the following documents to the bank:

General documents:

Pan card
ID proof
Address proof
Passport size photo of applicants and co-applicants

For Self-employees individuals / Sole proprietorship:

Last year’s GST returns
Status of existing loans
Last year’s bank statement
Audited ITR for the past three years
Financial statements for the past three years

For Partnership Firms / Private Limited Companies:

Last year’s GST returns
Status of existing loans
Last year’s bank statement
Partnership deed in case of partnership firm
Incorporation certificate in case of a private limited company