If you are a small business owner looking for funds to expand your business, you have two main options: taking a Business Loan or applying for an overdraft (OD). Both the funding products provide financial support to existing business owners with a few years of experience. However, the features of an OD loan for business differ from new Business Loans. When you ask, 'Which is the better credit option?', the answer largely depends on your current financial requirement. Let’s discuss some basic features of Business Loans and overdrafts and compare them to select a more suitable credit facility among the two.
What is a Business Loan?
Business Loans are unsecured credit that entrepreneurs can use for business-related expenses like hiring staff, purchasing raw materials, buying machinery or plant, training employees, expanding operations, marketing, or building working capital. At Hero FinCorp, you can obtain an unsecured Business Loan of up to Rs 40 Lakh at competitive interest rates and flexible repayment terms of up to 60 months.
What is an Overdraft?
Overdraft (OD) is a credit option that gives you a credit limit of up to a certain amount. You can withdraw funds from your current account up to that limit even if it has zero balance. It is an excellent funding facility for emergencies and to meet short-term business expenses. The financial institution determines the overdraft fee or interest rate that differs between service providers. The best thing is that it allows you to borrow more than your account's credit balance.
Business Loan Vs Overdraft - Which One Should You Choose?
Now that you know what a Business Loan and a business Overdraft loan are, here are a few things you must understand to make a better choice between the two:
Nature of Product
Business Loan is a type of borrowed capital you receive in a lump sum. It is a one-time funding you can use for your business purpose and repay in EMIs. In contrast to a Business Loan, an OD is a credit line that gives you a credit limit. You can withdraw funds up to that limit as and when necessary.
Collateral
New Business Loans can be both secured and unsecured. You can borrow one according to the assets you own, the risk you can take, and the surety of repayment. If you take a secured loan and fail to repay, the lender may seize the asset to sell it and recoup their outstanding balance. On the other hand, an overdraft is an unsecured credit facility that does not put your assets at risk.
Interest Rates
Once you borrow a Business Loan, you must repay the entire amount to the lender in EMIs spread across the loan term. The EMI amount remains fixed, and each EMI contains a certain percentage of the principal amount and interest cost. You must repay the interest rate even if you borrow excess and a large part of the loan amount remains unused. On the other hand, if you take an overdraft, you can only withdraw the amount as and when required and pay interest only on the withdrawn amount.
Duration/Tenure
With a Business Loan, you can choose a suitable loan tenure with EMIs you can easily afford. Top loan providers like Hero FinCorp are flexible with their repayment terms. Contrary to that, an overdraft is ideal for short-term financial needs arising occasionally while running a business.
Features of a Business Loan
Some features of new Business Loans include the following:
Ample loan amounts of up to Rs 40 lakh
Competitive interest rates, starting at 15%
Can be used for any legal purpose without restrictions
One-time lump sum payment
Long-term financial support
Repayment in EMIs
Interest chargeable on the borrowed amount
Eligibility depends on your profile, credit score, business experience, etc.
Features of an Overdraft
Take a look at the features of an OD loan for business purposes:
Funds available with a line of credit
Facility to borrow an amount even with zero account balance
Interest is charged only on the withdrawn amount
Reliable short-term funding source
Repayment done through bank deposits
Eligibility depends on the money available in the current account and the relationship with the finance provider
Facility available to account holders only
Different Types of Overdraft
Let’s look at the different types of business overdrafts:
Overdraft Against Salary: This facility is available for salaried individuals having a salary account with the credit provider.
Overdraft Against Savings Account: You may obtain an OD for business, like a loan, from an institution where you have a savings account.
Overdraft Against Fixed Deposits: Eligible depositors can take an overdraft against their fixed deposits with a financial institution.
Overdraft Against Insurance Policies: Some finance providers offer overdraft facilities against life insurance policies.
How to Apply for a Business Loan?
Download the Hero FinCorp loan app
Register using your phone number or email
Fill out an online application form
Scan and upload the necessary documents
Wait for verification
Accept the loan offer
Get disbursal in your bank account
How to Apply for an Overdraft
Visit your finance company’s website
Log in to your net banking account
Select 'apply for a new overdraft.'
Enter the overdraft limit you want
Enter a few business details
Review details and finalise the application
Conclusion
As the debate between a Business Loan and OD loan for business comes to an end, we conclude that no one is an obvious winner here. The one you choose depends on your business needs. For instance, opt for an OD for business, similar to a loan, if you want a short-term funding solution. However, a Business Loan is more suitable if you need more significant funding. To get an unsecured Business Loan, you can apply online with Hero FinCorp to get the required financing without hassle.
Frequently Asked Questions
1. What is better, a business loan or an overdraft?
The final choice between a Business Loan and an overdraft depends on your funding requirement, eligibility, frequency of funding needs, etc.
2. Is an overdraft facility good for business?
Yes, an overdraft facility is good for your business if you need smaller amounts at frequent intervals rather than a considerable lump sum.
3. What is the difference between an overdraft and a loan?
Overdrafts and loans differ based on several factors, including loan amounts, interest rates, repayment schemes, eligibility requirements, etc.
4. What are the advantages of an overdraft over a loan?
Frequent access to funds and interest payment only on the withdrawn amount are the significant advantages of overdrafts over loans.
5. Is overdraft limit a loan?
No, the overdraft limit is not a loan. It is a credit line you can use whenever you need funds and pay interest only on the withdrawn amount.
