Know Which is Better Business Loan v/s Overdraft
Last Updated : Feb. 5, 2020, 6:55 p.m.
If you are looking to borrow funds, you might be considering an overdraft facility or business loan. Yes, both the credit facilities are different from each other but both provide financial support to the borrower, but they have their own characteristics. So below the comparison between a business loan and overdraft facility. Take advantage as per your choice which is suitable for your profile.
Business Loan
Business loans are basically designed for business purposes. A business loan is a fixed amount of borrowing money over a set period with regular repayments. You need a certain amount of money to start a new business, so a business loan is the best option to grow your business at a certain height. A business loan can opt for anybody who requires funds you have just to fulfil the basic requirements. A business loan is an unsecured loan that can be used for various purposes such as –
- Expanding the existing business
- To meet working capital needs
- For hiring new staff
- Training of new employees
- Purchase new plant and machinery
- Buying raw material
- Purchases new furniture
- Stocks and inventory
- Buying new premises
- Opting new technology
How does Business Loan work?
To take a business loan from any financial institution, you just have to fulfil the terms and conditions of that financial institution. As each lender has its own way of dedicating the loan amount. A lender pays different interest rates to different borrowers. The lender gives you the loan amount based on your CIBIL score , previous repayment tracks and more. This is the basic structure of your business loan amount. The rate of interest is taken as a percentage of the principal amount.
Why Choose Business Loan?
Here are the few reasons why to avail a business loan
- A business loan is basically taken for a long period of time.
- If you are planning to take a business loan for a longer period then the interest rate will not be as high.
- The interest rate is fixed and floating you can take as per your choice.
Overdraft
Overdraft is a facility that allows you to withdraw money from your current account, even if your account balance is also zero. Basically overdraft facility may be available when you have an emergency. This facility may be available for short term business needs.
How Interest Rate is Implemented on Overdraft
As different lenders have different criteria for implementing the interest rate. So the interest rate will be decided on the basis of the amount for which borrower is eligible and the credit balance on your account.
Why Choose Overdraft?
- Get a flexible option for borrowing and repayment options.
- This overdraft facility is for short term and it is the cheapest.
- You can even borrow money from your current account when your account has insufficient funds or zero balance.
Advantage of Overdraft Facility
- Avoiding unnecessary fees if the overdraft exceeds your limit.
- The best way to handle short-term changes in your cash flow.
- If you have this credit facility in your current account, you can be overdrawn to an agreed limit.
- With the help of the overdraft facility, you can avoid late payments and fines even if there is insufficient balance in your account.
Compare Business Loan with Overdraft Facility
About Business Loan
A business loan is an amount that can be repaid for a fixed time period in the form of monthly EMI.
| Business Loan | Details |
|---|---|
| Rate of Interest Calculation | Calculated on a Monthly Basis |
| Repayment of Loan | It can be paid in the form of EMIs |
| Calculation Of Loan Amount | Depends on Borrower Nature of Business, Vintage, Cibil score and more |
| Tenure Period | For Long Term |
| Loan Type | Borrowed Capital |
Know About Overdraft Facility
In overdraft facilities, you can withdraw money, even if you have a zero balance in your account.
| Overdraft Facility | Details |
|---|---|
| Type Loan | Credit Line |
| Tenure Period | For Short Period |
| Repayment Loan | It can be paid in the form of Bank Deposit |
| Decided Amount | Relationship with bank Depending on the amount in your current account |
| Calculation of Loan Amount | It can be calculated on a daily basis |
Business Loan v/s Overdraft
- If you are looking for a longer-term, then opt for a business loan or for a short term benefit get overdraft facility. Both the rate of interest and the method of application is different.
- A business loan is a better option if you are taking a loan for a higher amount and longer tenure whereas overdraft is for less amount and short tenure.
- Business loans can be availed by any businessman, but overdrafts can only be taken by those who have a current account.
- loans can be availed for fixed and floating interest rates, while overdrafts can be availed by some lenders at no interest rate.
- Business loans are available for 5-10 years, but overdraft facility is available for one year only, it can be renewed every year.
- In a business loan, the interest rate is levied on the monthly principal while the overdraft depends on the daily debit balance.
Both business loans and overdraft facilities have their own features and benefits. Hence you can avail both credit facilities with the help of minimum documents. This entire process is hassle-free.