If you are an entrepreneur and want to start a new business or expand your existing business, you might think of taking a business loan or overdraft to fulfil your financial requirements or to meet working capital requirements. Both the financial products are meant to provide funding support to the borrower but they have distinctive features and nature.
The question arises ‘Which credit option is better?’ The answer solely depends on your financial requirements. Further, let’s discuss some of the basic features and comparison of these two credit facility that makes it simple for you to decide.
Business loan is an unsecured loan that is used for various business purposes like business expansion, meeting working capital needs, buying land or property, purchasing plant or machinery, hiring staff, training employees, purchasing raw materials, enhancing stocks and inventory, etc.
Overdraft is a credit facility that allows you to withdraw money from your current account, even if the account balance is zero. Overdraft credit facility can be used in emergencies or to fulfil short-term business requirements. The interest rate or overdraft fee is defined by the financial institutions and differs from bank to bank. You can borrow money over and above your account’s credit balance.
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For you to get the basic comparison between a business loan and an overdraft facility:
| Types of Comparison | Business Loan | Overdraft |
| Definition | Fixed loan amount borrowed for a definite period of time, against collateral (if secured loan) and to be repaid with an interest rate in the form of EMIs | Amount can be withdrawn even if the bank account balance of the borrower is zero or below it |
| Loan Type | Borrowed Capital | Credit Line |
| Interest Rate charged | On the sanctioned loan amount | On overdrawn amount |
| Availed as | Long-term Loan | Short-term funds |
| Repayment Type | In the form of EMIs | From bank deposits |
| Interest Rate Calculation | Monthly Basis | Daily Basis |
| Loan Amount or Borrowed Funds | Depends on business requirements, applicant’s profile, credit score, etc. | Depends on the amount of money in the current account, relationship with the bank |
| Does the applicant need to be an account holder of the bank? | No, it is not required to be the account holder | Yes, the borrower needs to be the account holder to avail overdraft facility |
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Business loan is a viable option if you want to take higher loan amounts for a longer tenure. Most banks and NBFCs offer a fixed rate of interest on the loan amount which means you know how much you have to repay in a set tenure. On the other hand, an overdraft can be availed at no interest rates by a few lenders across the financial market and moreover it can meet your short-term monetary requirements with flexible repayment options. The interest rate offered for an overdraft facility is comparatively higher as compared to a business loan. To avail overdraft facility, applicants need to submit a written request to the respective bank and the renewal of the credit facility which is valid for one year depends on the sole discretion of the sanctioning bank. Overdraft is a type of revolving loan in which the customer deposits the amount to re-borrow the same. The interest rate which is charged by the bank depends on the daily debit balance of the current account of the borrower.
As per the RBI’s regulations, cash credit accounts and current account holders are eligible for an avail overdraft facility of Rs. 50,000 per week. If you have decent financial history and maintain regular repayment habits with a good credit score then you are eligible to an avail overdraft facility.
Generally, Business loans are termed as unsecured loans but in some scenarios business loans can be secured and require collateral to be submitted to the lender, whereas there is no need to submit any collateral in case of an overdraft facility.
Overdraft facility is mostly availed to meet the short-term loan requirements of businesses, whereas business loans are offered in large range that helps to fulfil the financial requirements of almost every entrepreneur and enterprise. Overdraft facility can only be availed by current account holders of any respective bank but business loans can be availed by various entities, including individuals, women entrepreneurs, retailers, manufacturers, traders, private and public limited companies, sole proprietorships, partnership firms, limited liability partnerships (LLPs), NGOs, SMEs, MSMEs and large enterprises.
Both the credit products have their own benefits to avail that come in handy at the customer’s disposal. With minimum documentation and hassle-free process, customers can avail credit facility that best suits their requirements.
