Dropline Overdraft for SMEs: Features and Benefits

India is a young, enterprising, and lively economy that many see as a possible future superpower. India is quickly establishing itself as a centre of innovation, thanks to its burgeoning tech sector. 

Some critics, however, contend that a lack of access to capital is holding back some SMEs. The agricultural industry, which, of course, has over 1 billion mouths to feed, is only second to the SME sector!

Small and medium-sized enterprises (SMEs) in India account for roughly 45 percent of the country’s industrial output and 40 percent of its overall exports. 

The SME sector barely receives 16% of overall bank loans in India.

It’s in such a situation that financial instruments like Dropline Overdraft can be of significant value to the SMEs financing needs.  

What is Dropline Overdraft Facility?

 An overdraft, like a short-term loan, involves withdrawing excess funds from your account. You can take money from your account up to a particular predetermined limit with a business overdraft. 

This money can be used for a variety of purposes in your firm such as working capital or expansion, but you will be charged with interest on the excess cash. The interest rate on an overdraft is determined by the base lending rate. 

Dropline overdraft is a step forward from this facility, combining the benefits of both term loans and overdrafts.

A dropline overdraft facility is a financial instrument that allows a borrower to overdraw money from their account up to a predetermined amount. 

They are long-term overdraft loans that can be extended for up to 15 years. Unlike typical overdrafts, they don’t require a yearly renewal fee—only a one-time processing charge, similar to that of a term loan.

After accepting collateral, such as residential or commercial property, lending institutions offer dropline overdrafts. However, in case of strong financial backing, the facility can be taken up even without collateral. 

Let’s understand the dropline overdraft with an example: 

In a dropline overdraft example, if the overdraft facility is for 60 months and the original overdraft amount is Rs. 10 lakh, the operating limit will be automatically lowered by 10,00,000/60 = Rs. 16,666 after one month if it is set at a monthly drop frequency.

This means that at the conclusion of the first month, the operating limit will be (10,00,000 – 16,666) = Rs. 9,83,334. This computation will continue for the second month and each subsequent month until the end of the repayment period in a typical dropline overdraft facility.

Dropline Overdraft’s Characteristics

1. Each month, the withdrawal limit is reduced from the initial sanctioned limit.
2. It is available as a secured and unsecured loan.
3. With unsecured loans, there is no need to produce collateral. Overdraft facility with no collateral is issued to only the enterprises that can show a strong financial holding. 
4. The interest rate is charged monthly, however, it is calculated daily.
5. It’s possible to use it on a monthly, quarterly, half-yearly, or annual basis.
6. The Dropline limit is usually set for 1–15 years.
7. It’s a hybrid of a term loan and an overdraft.

Benefits of Dropline Overdraft

1. An overdraft is more flexible than a loan because you only borrow what you need, which may make it less expensive.
2. No monthly repayments like term loans for the facility. 
3. The interest is charged only with the amount used out of the facility.
4. In most cases, there is no penalty for paying off an overdraft sooner than intended.
5. Can be operationalized monthly, quarterly, semi-annually, or annually.
6. A fusion of term loans and overdrafts.

How Oxyzo Can Assist

Navigating the finance realm can be daunting. Oxyzo steps in here, offering tailored solutions that prioritize your SME’s growth and stability. Discover how we can simplify your financial journey and propel your enterprise forward.