Business Loan Vs. Loan Overdraft: Which Credit Option is Best for You?
When you need extra funds for your business, you may be considering either a business loan or a loan overdraft. Both of these credit options can provide your business with the financial assistance it needs to operate and grow. But which one is a more suitable option for your business? A business loan or a loan overdraft? In this article, we’ll explore them to help you decide which one is best for your business.
What is a Business Loan?
A business loan can be obtained from a bank or a non-banking financial company (NBFC) with the objective to infuse additional cash into your business. Depending on your requirements, you may obtain a business loan for a short or long period of time.
There are different types of business loans available, each with its own set of benefits and drawbacks. The following are the most common type of business loans available in India:
- Term loan: A term loan is simply a loan that is granted for a certain period of time and must be repaid in monthly instalments. Term loans usually have a longer tenure.
- Working capital loan: Working capital loans help businesses with their day-to-day expenses. This form of loan is often taken for a short tenure.
- Loan against property: A business loan against property is a secured form of loan where the borrower needs to mortgage a property. It is possible for the property to be residential, commercial, or industrial. The loan amount is often a proportion of the property’s market value.
- Business credit card: A business credit card is similar to a personal credit card, except that it is meant for business use. It can help improve a company’s credit score for future borrowings.
- Invoice Financing: Invoice financing is a sort of loan in which a company borrows money against its unpaid invoices.
If you’re considering taking a loan for your business, it’s important to compare all of your options to find the one that best suits your needs. Consider factors such as the amount of money you need to borrow, the time duration you need to repay the loan, and the interest rate you’ll be charged before making a decision.
How Does a Business Loan Work?
A business loan is a sum of money that you borrow from a lender and agree to pay back over a set period of time, along with the agreed interest. You can use a business loan for a variety of purposes, such as expanding your business, buying new equipment, or covering operating expenses.
To qualify for a business loan, you will need to have good credit and demonstrate that your business has strong financials.
What is a Loan Overdraft?
Loan overdrafts allow you to borrow funds up to a certain limit when you need them. This can be helpful if you have unexpected expenses or need short-term financing for your business.
The main advantage of an overdraft facility is that you need to pay interest only on the utilised amount of the overdraft limit. The repayment period for a withdrawn amount is determined by the lender’s policy and agreement.
How does an Overdraft Work?
A loan overdraft is a type of credit facility that allows business owners to withdraw more funds from their accounts than they have available. This can be useful for managing cash flow or covering unexpected expenses. However, it’s important to understand how loan overdrafts work before using one.
When you take out a loan overdraft for business, the bank will set a maximum limit for how much you can withdraw . This limit will be based on your business’s financial history and ability to repay the debt.
If you need to withdraw more money than what’s available in your account, you’ll have to pay interest on the outstanding amount. The interest rate on an overdraft facility is usually higher than what you’d get with a regular business loan. In addition, there may be other fees associated with using an overdraft facility. However, interest is charged on the amount withdrawn from the facility and not on the total limit provided.
Business Loan Vs. Loan Overdraft: which is better for your business
Now that you understand the concept of an overdraft and a business loan, here are a few things to consider when choosing between a business loan and a loan overdraft:
One of the first things to consider is how much money you need to borrow. If you only need a small amount of money, then an overdraft may be the better option. On the other hand, if you need a larger sum of money, then a business loan may be a better choice.
Another thing to consider is how long you need the financing. If you only need short-term financing, then an overdraft may be a better option. However, if you need financing for a longer period of time, then a business loan may be a better choice.
Comparison between Business Loans Vs. Overdraft
From the Table below you can see the Comparison between business loans vs overdrafts:
|Definition||It is a predetermined sum borrowed from the lender. It is returned with interest over a set period of time.||It is a service provided by the bank in which the consumer can withdraw an amount larger than the balance. There is also a max limit for overdraft.|
|Nature of the product||Borrowed capital||Line of credit|
|Ideal for||Long-term funding needs||Short-term funding needs|
|Interest charged||On the sanctioned loan amount||On the amount withdrawn from the available credit limit|
|Calculation of interest||Monthly or annual basis||Daily basis|
|Repayment||In the form of fixed monthly EMIs||The amount is deposited in the bank account.|
|Bank account||It is not required to have a bank with the lender.||You must maintain a bank account with the lender to avail this facility|
overdraft vs loan, which is better for you? It depends on your business circumstances and financial needs. One should carefully opt for the same based on their business requirements. We hope that this article has given you the whole picture and helped you to better understand the pros and cons of each option.
1. Which option is better, an overdraft or a loan?
The answer to this question depends on your specific situation and needs. If you need a large sum of money, a loan may be the better option. However, an overdraft may be the better choice if you only need a small amount and can repay it relatively quickly. .
2. How do I qualify for a business loan?
To qualify for a business loan, you will need to have good credit and demonstrate that your business has the ability to repay the loan. Every lender has their lending eligibility criteria based on which they sanction the loans.
3. Are business loans cheaper than loan overdrafts in terms of interest?
Yes. The interest rate for a loan overdraft facility is usually more than that of a business loan. However, in the case of OD, you need to pay interest only on the utilised amount.
4. How much can I borrow with a business loan?
The exact amount will depend on factors such as your credit history, annual revenue, business profits and how much collateral you can put down(In the case of secured loans).