DLOD stands for Dropline Overdraft. It's a credit facility offered by financial institutions that allows businesses to overdraw funds from their current account, up to a pre-approved limit. This limit is agreed upon between the bank and the business.
Key Features of Dropline Overdraft (DLOD):
- Overdraft Facility: Businesses can withdraw more money than their account balance allows.
- Pre-Approved Limit: The maximum amount that can be overdrawn is predetermined.
- Current Account: The facility is linked to the business's current account.
- Interest Charges: Interest is charged only on the amount overdrawn, not the entire limit.
- Repayment Schedule: DLOD typically involves a repayment schedule, where the outstanding amount needs to be gradually reduced over time. This is unlike a regular overdraft facility where the overdrawn amount can remain constant for a longer period. The "dropline" aspect refers to the decreasing (or "dropping") outstanding balance required by the repayment schedule.
How DLOD Differs from a Regular Overdraft:
The primary difference lies in the repayment structure. While a regular overdraft may allow a consistent outstanding balance for an extended period, a DLOD mandates a regular repayment schedule, gradually reducing the outstanding amount. This makes DLOD suitable for businesses with predictable cash flows that can support regular repayments.
Example Scenario:
A business has a DLOD facility with a limit of \$100,000. They overdraw \$50,000. They only pay interest on the \$50,000 overdrawn amount. Furthermore, the terms of the DLOD might require them to reduce their outstanding balance by \$10,000 per month.
Benefits of DLOD:
- Access to Funds: Provides immediate access to funds for working capital needs.
- Flexibility: Interest is charged only on the amount utilized.
- Supports Growth: Helps businesses manage short-term cash flow gaps and pursue growth opportunities.
Considerations:
- Interest Rates: Compare interest rates from different lenders.
- Fees and Charges: Understand all associated fees.
- Repayment Schedule: Ensure the repayment schedule aligns with your business's cash flow.
In summary, a Dropline Overdraft (DLOD) is a valuable financial tool for businesses seeking flexible access to funds, provided they can manage the required repayment schedule.
