A commonly raised finance query among business owners is whether they should opt for a business loan or an overdraft facility to meet their funding requirements. Maintaining a healthy cash flow is vital, whether it is an expanding startup or an established enterprise; every business has varied financial needs. Therefore, it is essential to understand which of these sources is right for your business and its unique requirements.
In this article, we shall understand loans for business and overdraft. What do they entail, and which one is suitable for you? We shall explore the unique features of both these options and how they can help you scale your business.
What is a Business Loan?
A business loan is an amount borrowed in a lump sum from a financial institution like a bank, NBFC or financial service provider. This amount has to be repaid over a fixed tenure in pre-decided installments, along with interest. The following are a few things that one must understand about opting for loans.
- The amount of borrowing is fixed. The loan amount disbursed to you is based on your requirement, income and/or creditworthiness. The tenure of repayment is also predetermined.
- With loans, predicting and planning for Equated Monthly Installments (EMIs) is easy.
- A loan can be secured or unsecured as per the lender’s discretion. A secured loan requires you to provide collateral to avail, whereas an unsecured loan does not; it is based on your creditworthiness.
- It has become effortless to business loan apply online. With digital documentation, online eligibility checks and instant approvals, getting loans is easier than ever.
What is an Overdraft?
An overdraft refers to the facility your current business account provides to fulfil your short-term credit requirements. This facility allows you to withdraw more money than your current balance in the account, up to a particular pre-approved limit. The following features will help you understand overdrafts better.
- Overdrafts allow for flexibility with funds and unrestricted cash flow. They help you ensure that operations keep going despite short-term fund shortages.
- You are required to pay interest, but only to the extent of the credit amount utilised and for the period it was used.
- Unlike business loans, there are no fixed repayment schedules or EMIs.
- Overdraft facilities are provided by various banks. A good banking relationship and regular repayments ensure that you enjoy the benefits of this service hassle-free.
Business Loan: The Right Option for You?
Now that we understand the basics of loans, we must also know if they are suitable for us. These points of consideration will help you decide whether business loans are right for you.
- If you are starting a business or are about to make a sizeable investment, and therefore require a significant sum of money, then you should go for a loan and get the desired amount disbursed lump sum.
- If you wish to manage your finances with well-structured EMIs and easy budgeting, loans can provide the predictability and stability you need, with their predetermined tenure and interest amounts.
When Should You Choose Overdraft?
We have seen how overdrafts are different from business loans. Let us understand the scenario where overdraft should be the way to go.
- If your goal is to have smooth day-to-day operations without worrying about short-term liquidity issues and temporary cash flow challenges, overdrafts are ideal.
- If you have clients with variable payment cycles or your business has seasonal influences, such as peak times or off-seasons, an overdraft facility can help you attain stability.
Conclusion
The choice between loans and overdraft ultimately comes down to your unique business goals and purpose. A long-term loan can ease heavy capital expenses if your enterprise requires you to invest in large machinery, infrastructure or other assets. On the other hand, if you do not want the rigidity of EMIs and only want to ensure unrestricted cash flow and liquidity, opting for an overdraft facility would be wise for you.
Availing a business loan online has been made more straightforward than ever by Bajaj Finserv, India’s leading financial services provider. Their seamless online application process allows you to apply for a loan from anywhere and any time, at your convenience. You don’t have to worry about providing collateral or any hidden charges. Known for their transparency, they are upfront about all charges and fees. So, get your loan disbursed within 48 hours of approval and scale your business now!