Business Loan Vs Overdraft – Which One To Choose?

If you are planning to start a new business or want to expand your existing business, you need funds. The best way to generate them is by taking a business loan or opting for an overdraft. Both are the financial tools meant to provide funding but have distinctive features and attributes.

Business Loan

As we all know that business loan is an unsecured or secured loan used for various business activities. These can be business expansion, buying land or property, purchasing plants or machinery, purchasing raw materials, hiring staff, training of employees, improving stocks and inventory, meeting working capital needs, etc.

Overdraft

An overdraft is a facility that permits you to withdraw money from your current account, in spite of having zero balance in the statement. This credit facility can be of use in an emergency or to finance some short-term business requirements. The overdraft fee or interest rate varies for different financial institutions. 

Which Credit option is a Better Option?

To answer this question, you need to know some basic features of the business loan and an overdraft. Once you do the comparative study of their elements and attributes, you may come to some conclusion and can make your choice. Here is a comparative analysis of both:

Features	Business Loan	Overdraft
Nature	It is a fixed loan amount with a definite tenure, may or may not be secured, and you have to repay the amount with interest in the form of EMIs	An amount which can be withdrawn even if the bank account balance is zero or below it
Loan Type	Borrowed Capital	Credit Line
Rate of Interest	Predetermined interest on the loan amount sanctioned, the calculation is monthly	Interest on the amount overdrawn, to be calculated daily
Term of Funding	Long-term loan	Short-term funds, generally for a year
Mode of Repayment	In the form of EMIs	From bank deposits
Loan Amount or Borrowed Funds	It depends on your requirements, profile, credit score, etc.	It depends on the amount of deposit in the current account, maximum Rs. 50,000 per week
Does the applicant need to be an account holder of the bank?	No, it is not required	Yes, it is required
Who can avail of it?	individuals, like women entrepreneurs, retailers, manufacturers, traders, companies, sole proprietorships, NGOs, large enterprises, and many more	The current account holders of the financial institution
When to avail	When you want higher loan amounts for a longer tenure.	To meet the short-term needs.

Business loan Vs Overdraft

As is apparent from the above table, both types of funding have different features and utility. The choice of the kind of financing will depend upon your needs, credit score, business loan eligibility, ability to provide collateral, and many other relevant factors.

When to avail a business loan:

• When you need a higher amount to meet your financial needs
• When you wish to make repayment over a long tenure
• You have some property to offer as a collateral
• You have an excellent credit score
• When one-time borrowing can settle your financial needs
• When you have repayment capacity for monthly EMI

When to avail an overdraft facility:

• When your financial need is small
• When you cannot commit repayment over a long time
• When your credit score is not good
• When you do not have any asset to pledge as collateral
• When your financial needs are recurring, and you need a continuous supply of funds.

We can see from the above comparative analysis that both options have their merits and demerits. You have to pick between the two based on your needs and abilities.