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Tata Capital > Blog > Loan for Business > Business loan or Overdraft: Which is Better?

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Business loan or Overdraft: Which is Better?

Business loan or Overdraft: Which is Better?

If you're a business owner, there are various instances where you might need to borrow funds. These could include expanding your venture, meeting capital requirements or simply stocking inventory. And when it comes to business finance, there's more than a single option available in the market.

While the most popular financing method is a business loan, you can also consider an overdraft. Not sure what an overdraft is? Keep reading to find out.

What is an overdraft?

An overdraft is fundamentally a credit facility that allows you to withdraw funds from your current account, even if your account balance is zero. Briefly put, you can borrow money over and above your account’s credit balance.

Moreover, the interest is charged only on the amount withdrawn from the account and till the time it is repaid entirely. The rate of interest is usually determined by your lender based on your repayment capacity.

In that sense, an overdraft business loan is ideal for fulfilling any short-term business goals or overcoming an emergency.

Business loan vs overdraft: what should you choose?

Now that you are familiar with the concept of an overdraft loan, the question arises – which of the two credit options is better? Let’s dig deeper to find out.

• Nature of product

First off, business finance is a form of loan provided in a lump sum. In contrast, a business loan overdraft is a line of credit facility where you maintain a bank account and draw funds up to a prespecified limit. And so, you can pay off the former in the form of EMIs, and the overdraft in the form of bank deposit.

• Collateral

Business finance can be secured or unsecured, which means you may or may not have to pay collateral depending on the loan type. On the other hand, an overdraft does not require you to pledge any collateral.

Additional Read: 5 Ways to Use Retail Business Loans

• Interest rates

The business loan interest rates are calculated every month and reflected in your monthly instalments. On the contrary, the interest rates for an overdraft are calculated on a day to day basis. Hence, it affects your daily debit balance.

• Duration/Tenure

With business finance, you can borrow a higher loan amount for a longer tenure, which makes it suitable for financing long-term goals. On the other hand, an overdraft is best for short-term financial requirements that may arise from time to time like cash flow shortage.

Additional Read: Can You Get a Business Loan with Low Revenue?

Final thoughts

To end the business loan vs overdraft debate, we can conclude that there is no obvious winner here. Instead, you must decide which option is more suitable for your business requirements. If you're looking for a short-term solution to fulfil some urgent financial needs, you can opt for an overdraft. However, if your business needs some significant funding, business finance is the way to go!

Looking for a reliable lender to borrow business finance? Tata Capital is at your service. We can provide you loans customised to your business needs in just a matter of minutes. Take advantage of our pre-approved offerings, overdraft facility, minimal paperwork, and a 6-step online application process. Connect today!

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