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Business Loan or Overdraft – Which is Better?

As an entrepreneur, you are engaged in a cut-throat competition to be recognized by the world at large. Raising capital is one of your perennial agendas. You want to grow, and putting money into your project is the only way to. From funding R&D to hiring more staff to procure higher quality raw materials – your securing funds directly impacts the performance of your company in the future.

There are several options available for you to secure funds. Two of the most popular means of doing so are via business loans or via overdrafts. They both are widely used means of securing funds, and both have distinct advantages that can benefit the entrepreneur. Before detailing the comparison points of each, it is important to understand what each of them is.

Business Loans

A business loan is a specific amount that is borrowed from the bank or NBFC (Non-Banking Financial Institution) for a given period of time. Business loans can be unsecured (offered without collateral) or secured (offered in exchange for collateral) and are repaid with interest in monthly EMIs.

You can apply for business loans of up to ₹30 lac within 3 minutes on Finserv MARKETS. With zero collateral requirements, repayment tenures ranging from 12-60 months, and value-added services such as Financial Fitness Reports, you are offered the perfect way to achieve your company’s business potential!

Overdraft

An overdraft, unlike a business loan, allows you to withdraw money from your own bank account. This is true even if your bank balance is zero. This is a credit facility that is preferred for short-term business engagements or in case of emergencies. Overdrafts allow you to borrow money on top of the account balance.

The interest rate levied on overdrafts, and the fee associated with it, vary from bank to bank. Further, the interest rate calculation is performed on a daily basis, making it higher than business loans.

Availing Business Loan vs. Overdraft

Now that we know the salient points of difference between the two, it is important to understand how to avail a business loan or an overdraft.

Business loans are availed from lending institutions based on your business requirements, assessed by the bank itself. The profile of the applicant, along with their CIBIL score (preferably over 700) is assessed before offering the loan. The repayment schedule is decided upon before disbursing the loan, and the payment schedule is to be adhered to by the borrower. A business loan can be availed from any lending institution, and not necessarily from the one that you have an account with.

Overdrafts, on the other hand, are availed only from the financial institution, with which you have an account. This is because the amount is borrowed from your account itself. Whether your request for an overdraft will be approved depends upon the amount of money you have in your account. Thus, in practice, while an empty bank account does allow you to take an overdraft, an account with some amount in it will certainly improve your chances of availing an overdraft. Secondly, the relationship that the borrower shares with their bank will also impact their request for an overdraft.

According to the RBI’s stipulation, one can borrow as much as ₹50,000 per week in the form of overdrafts. With acceptable financial history and a steady history or repayment habits, one can avail of an overdraft for their short-term business needs.

Conclusion

Now that we know the salient points of both, a business loan and an overdraft, the merits of each are quite evident. In conclusion, a business loan is a better choice for longer financial commitments for your company. On the other hand, an overdraft is a good choice for smaller requirements.

While a business loan’s interest rate is calculated on a monthly basis, that of an overdraft is calculated on a daily basis. It is important to know the scope of your business requirement and ascertain the absolute necessity to avail of a loan or an overdraft, before initiating the process.

Finally, in both cases, it is absolutely imperative to pay back the lending institution back in the stipulated time period, lest you default on your loan and impact your business. Depending upon your needs, you can apply for either a business loan or an overdraft.

If you are considering applying for business loans, Bajaj Finserv Business Loans on Finserv MARKETS offer loans of up to ₹30 lakhs without collateral and with a flexible loan repayment tenure of 12-60 months. With several benefits such as minimal documentation, competitive interest rates, and a high loan amount, the business loan on Finserv MARKETS has everything you need to make your business soar!

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