Business Loan or Overdraft – Which Is the Better Option?

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hand, if you take an overdraft, you can only withdraw the amount as and when required and pay interest only on the withdrawn amount.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• Interest is charged only on the withdrawn amount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.