Difference Between Overdraft and Working Capital Loan
Last Updated : Feb. 6, 2023, 3:32 p.m.
Working Capital loan can be used for your daily business operations so it cannot be used for the long term, while the overdraft facility where you can withdraw the money from your account even if your account balance is zero or have insufficient balance. You can opt this facility is an emergency when you don’t have a fund.
Know About Overdraft and Working Capital Loan?
| Particulars | Overdraft | Working Capital Loan |
|---|---|---|
| Meaning | Overdraft is a facility where you can withdraw money from your bank account even if your balance is zero. These facilities should only be for short term borrowings or emergencies. | A working capital loan is used for everyday tasks of a business such as advertising, marketing, sales and many other functions. |
| Interest Rate | Interest rate is calculated on a used amount on a daily basis. | Interest rate is calculated on a monthly basis. So you can pay through equated monthly installment (EMIs). |
Overdraft Facility
Overdraft facility is that facility which can be taken at the time of quick financial needs for the shorter tenure period. Basically, the overdraft facility is available by the borrower who is operating a current account.
Features and Benefits of Overdraft
- You can use this overdraft facility personally and business purposes.
- It does not require any kind of security, guarantor and collateral to avail overdraft.
- You can only pay interest on the money you withdraw.
- You can avail the overdraft facility to cover short term cash flow issues.
- Do not have to pay interest rate monthly, It is calculated on a daily basis.
- You can use the amount when you need the fund.
- The current account holder withdraws money even when the account balance reaches zero.
How to Calculate the Overdraft Facility
- This is the way to calculate the overdraft facility.
- Current Annual Percentage Rate (APR) by 365 days but in the leap year, it will be divided by 365 days.
Working Capital Loan
A working capital loan is a short-term finance that represents the operating liquidity available to your business. The main purpose of working capital is to finance the day to day operation of the company which includes many many types of expenses such as daily wages of the employees, buying raw material and more.
How to Calculate Working Capital Loan
Working capital can be calculated on their current assets and current liabilities. So below the formula to calculate working capital.
Working Capital = Current Assets – Current Liabilities
Eligibility Criteria of Working Capital
- The applicant minimum age starts from 21 years and the maximum age at the time of loan maturity is 65 years.
- Nature of business must be positive and it should not be blacklisted.
Features and Benefits of Working Capital Loan
- Working Capital Loan is used for the daily working capital and short term expenses of the business.
- It requires minimum documents with a quick disbursal process.
- The loan amount can be used day to day operation of the business.
- Financial institutions offer attractive interest rates and flexible tenure options as per your requirement.
- You do not have any restriction on the use of funds.
Different Types of Working Capital Loan
It offers different types for working Capital Loan to meet your day to day operation of your business.
- Short Term Loan
- Line of Credit
- Trade Creditor
- Account Receivable
- Bank Guarantee
- Factoring or Advances
When you need money to grow your business, it shows that your business is short of funds or you want to expand your business. So with the help of overdraft and working capital you can solve this problem. So take advantage of both accordingly which is suitable for you.
