What is Business Overdraft And How it is Different From Business Loan

Businesses often require funds for meeting their financial obligations. That is why they reinvest their profits to create reserves which are used as and when financial requirements present themselves. However, in many instances, the reserves don’t prove sufficient. Even when they are, many businesses try and avoid using their reserves and look for Business loan. To provide businesses with required funds, business loans are available. There are different types of business loans for different needs. Business overdraft is also a kind of loan for business which is often confused with term business loans. However, overdrafts are different. Let’s understand how –

What is business overdraft?

A business overdraft is a loan which you take against your bank account. When you have an account with your bank and the bank allows you an overdraft facility it means that you can withdraw from your bank account in excess of the available balance. The excess availed is treated as an overdraft which you need to repay. For instance, say your business bank account has an available balance of INR 10, 000. You issue a check on this account amounting to INR 15, 000. Your bank would clear the payment on the check through its overdraft facility. The extra INR 5000 is funded by the bank in the form of a loan which is called a business overdraft loan or, simply, an overdraft.

Difference between overdraft and business loans

Traditional business loans are called term loans as they are offered for a specific tenure. They differ from overdrafts in the following manner –

Points of difference

Business overdraft

Business loan

Usage

Overdraft is availed for meeting the short-term financial requirement of businesses

Business loans, on the other hand, are availed for meeting the long-term requirement of businesses

Quantum of loan

A limited amount is allowed as overdraft depending on the financial standing of the business in the eyes of the bank

A higher amount can be taken as loan

Repayment tenure

Short repayment tenures usually up to a year

Business loans come with a long term tenure which goes up to 5 years

Type of loan

Overdrafts are unsecured loans

Business loans can be secured or unsecured loans

Interest calculation

In case of overdrafts, the interest is calculated only on the excess amount which is withdrawn from the bank account over and above the available account balance

Interest is charged on the entire amount of loan granted by the lender whether the business uses the loan completely or not

Repayment of the loan

The loan is repaid by making deposits into the bank account from which the overdraft facility has been availed

Repayment is done through monthly EMIs

Also Read: Types of Business loan Options Available

So, these differences clearly state that overdraft and loans are completely different from one another. While overdrafts help your business temporarily by providing short-term funds, business loans are meant for long-term financial requirements. Overdrafts charge interest only on the amount overdrawn and are thus, quite affordable for meeting short-term financial requirements of your business. So, understand the differences between the two and choose the option which best suits your requirements.

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