April 21, 2024

Bigbangin Pyongyang

Best Business Strategy

Business Loan vs. Overdrafts: Which is a Better Option?

Small Business Loan vs Business Overdraft: Which One Should You Choose

Business Loan and Overdraft have the same function of providing funding support to his/her borrower. Yet, they differ from each other based on their nature and features.

Choosing the best credit option entirely depends on your financial needs. This article will help you compare both the options and choose the most suitable one for your requirements.

What is a Business Loan?

It is an unsecured loan (funding that doesn’t require any collateral) used for business purposes. They are usually taken for business expansion, purchasing land/property, hiring staff, and many more. 

Business Loans are wholly dedicated to business expansion and are suitable for people who own a business. 

The features of a business loan are:

  1. You can repay it in the form of EMI along with interest rates.
  2. It is a borrowed capital type of loan.
  3. Business loan interest rates are charged based on the sanctioned loan amount.
  4. It is available as a long-term loan.
  5. The Business Loan EMI Calculator helps calculate your monthly installments.
  6. The loan amount depends on the applicant’s profile and requirements.

The business loan eligibility criteria for an individual to apply for a business loan include:

  1. The applicant must be an Indian.
  2. The business should be at least 3 years old.
  3. The individual should have a minimum CIBIL score of 685.
  4. The person’s work status must be self-employed.
  5. The applicant’s age should be between 24-70 years.

The applicant should produce the following documents at the time of availing a business loan:

  1. KYC documents — a PAN card, Aadhaar card, ID card, etc. — are a must.
  2. The individual should present records indicating that they own the business for which they are requesting the loan.
  3. Any other business-related financial documents they have.

What is an Overdraft? 

An overdraft is different from the loan as, in this case, you have to withdraw the cash from your account. It is a credit facility that allows you to withdraw money from your account even if the balance is zero. 

It is a kind of revolving loan as you deposit the money in your account just to re-borrow it later. People usually take an overdraft in the case of an emergency. 

Features of overdraft are:

  1. It is a type of credit line loan.
  2. The interest is charged based on the overdrawn amount.
  3. You can use overdrafts as short-term funds.
  4. The repayment method for overdrafts is bank deposits.
  5. The interest rates are calculated daily.
  6. The loan amount depends on your current account balance and your relationship with the bank.
  7. The borrower must own the overdraft account; otherwise, they won’t be able to withdraw the amount. You will need to submit a written request to your bank to get an overdraft. 
  8. Interest rates charged in this case are slightly higher than the business loan.

 The eligibility criteria for an overdraft loan are as follows:

  1. The applicant must be between 22-58 years.
  2. The person must have a minimum monthly income of INR 35,000.
  3. The individual must have been in the same job for at least 6 months.
  4. Applicants must have a minimum of 2 years of work experience.

Documents required for application:

  1. A copy of the applicant’s salary slips for the last three months.
  2. An income proof or bank statements for the previous three months.
  3. Some photo identity proof for KYC documents.
  4. Documents for proof of residence, including driving license, voter ID card, etc.

Final Words

Business loans and overdrafts have their benefits and shortcomings. You should choose either according to your needs.

If you need funds for your business, you can always go for business loans and no overdrafts. And if you require money for emergency purposes, an overdraft will be a better option. Compare and choose the best funding support for yourself.