One common question that most entrepreneurs and business owners ask is, "which should I choose – business loans or overdraft? Which is the better choice for me?" The answer to this question is not simple. The right product depends on your business's financials and your needs. Here, in this guide, we take a closer look at the features, pros, and cons of both these products, helping you arrive at the right choice.
What is a business loan?
A business loan is an unsecured loan that you avail from a bank, NBFC, or other digital lenders to meet various business needs. Some instances when you can opt for business loans include:
For business expansion
To meet working capital needs
To invest in machinery, infrastructure or property for your business
For hiring additional staff
For purchasing raw material or stocking inventory
For training employees, etc.
Business loans can be taken for short to long-term, depending on your needs. Generally, these loans are offered for tenures ranging from one year to ten years.
How does it work?
When you apply for a business loan, the lenders allow you to borrow a bulk amount of money. You then repay the loan amount (principal) along with interest in the form of fixed monthly EMIs. The amount that you're eligible for depends on several factors like – the borrower's profile, business vintage, years of experience, financial status, credit history, credit scores, etc.
Business loans can be classified into two broad types:
Secured loans – Here, you pledge collateral or asset, to get the loan.
Unsecured loans – These loans do not require you to submit any collateral. However, the interest rates of unsecured loans are higher compared to secured loans.
What is an overdraft (OD)?
There may be times when your current account runs out of funds, and you're unable to issue cheques to suppliers or pay your workers. This is where an overdraft comes in handy. To explain it in simple terms, an overdraft is an extension provided by your bank. Using this facility, you can withdraw money from your bank account (up to a specific limit), even when your account doesn't have funds.
According to recent RBI regulations, all current account holders and cash credit account holders are eligible for an OD of Rs. 50,000 per week. You can easily avail of this facility if you have a good credit score and make regular payments to your bank.
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