Business Loans or Overdraft - Which one is Better?

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Sept 7, 2021Business Loan

The majority of businesses during their lifecycle have to depend on some form of loan or credit. Regardless of their industry, nature, or size, funds are required to get businesses off the ground, to operate and grow or even meet unforeseen expenditures.

There is a range of loan products such as business loans or overdrafts for business owners to choose from to meet business expenses. This can create confusion.

While the decision of selecting the loan product should depend on the needs of the business, the overwhelming array of loan types can often lead business owners to make the wrong selection especially if they are first-time borrowers.

To make the right decision, it is essential to understand the difference between overdrafts and a business loan.

What is an Overdraft?

An overdraft is a credit facility extended by your bank to withdraw funds up to a specified limit from the bank account even if the total funds are not available in your current account at that very point in time. This fund extension facility is extremely handy for businesses especially to meet day to day expenses of the business such as wage or vendor payments.

The Reserve Bank of India guidelines state has capped the overdraft limit for all current and cash credit account holders to Rs. 50,000 per week. You cannot withdraw funds if you have exhausted your limit. The benefits of an overdraft facility include only paying interest on the number of overdraft funds that you have withdrawn. Moreover, there is no fixed repayment tenure. The tenure to repay a withdrawn amount depends on the lender’s policy and agreement you have, and is usually very short. The repaid amount gets credited back to your overdraft limit. You can borrow and keep up with your repayments at the same time hence making this a type of revolving credit.

The overdraft facility is only extended to select customers or businesses who have a good credit rating and have been regular in their repayments to the bank. The overdraft facility is renewable on an annual basis. However, there are specific fees applicable to avail of the overdraft facility. Moreover, one must also be aware of the interest charges applicable.

What is a Business Loan?

A business loan can be availed by business owners to meet high-value expenditures directed towards expanding operations, meet working capital requirements, purchase equipment or machinery, invest in infrastructure, buying raw material or stocking inventory, hiring and training staff and employees, and more.

Must Read: How to Apply for a Business Loan Online?

Business loans are of two types - Unsecured and secured. Unsecured business loans do not require pledging any collateral and come with higher interest rates whereas secured loans require the applicant to submit security of a value that matches the applicant’s loan amount requirements.

Most business loans can be availed from a bank, NBFCs, or even digital lenders. They can range from short to long-term loans with repayment tenures ranging between 1 to 15 years. Most business loans come with fixed monthly installments and business loan interest rates that are more competitive in comparison to overdraft facilities. Fullerton India offers unsecured business loans upto INR 50 lakhs and secured loans against property upto INR 5 crores. Please note that the maximum business loan amount you can get will depend on your eligibility as well as Fullerton India’s policy at the time of loan application.

Bank Overdraft vs. Business Loan – Which is Better?

When it comes to a comparison between bank overdrafts vs. business loans, a number of factors come into play that can help you decide the right loan product.

  1. Loan Amount: If you are looking to meet small business expenses in the short term, an overdraft facility is an ideal instrument. However, if you need large sums of money to meet a high ticket expenditure in a single shot, then a business loan will be better suited to your needs. 
  2. Interest Rates: The interest rates for overdraft loans are higher in comparison to business loans. This is because the interest of overdrafts is applicable only on the withdrawn amount whereas business loan interest rates are applicable on the entire loan amount that is sanctioned by the lender, whether you use all of it or not. 
  3. Duration: Overdrafts are available for a limited duration of time, for example, a year. At the end of the year, you will have to put in a request with your bank to renew the facility for the upcoming year. If you are looking for a more convenient long-term repayment option, then a business loan will suit your needs much better.
  4. Usage: Business loans are perfectly aligned to both long-term and working capital expenses, as well as extended investments in business operations, growth, etc. Overdraft facility caters to the business meeting daily expenditures such as staff salary payments, inventory maintenance, and more. 
  5. Flexibility of Repayments: Repayments on overdraft do not come with any fixed repayment tenures or fixed monthly EMIs. You can repay the borrowed amount with interest at your convenience within the terms defined by the lender. Business loans come with fixed repayment tenures and monthly installments. You also have the option to foreclose business loans on which additional charges and fees may be applicable. 

How to Apply for a Business Loan?

If you have decided to go with a business loan, the first step involves successfully meeting the business loans eligibility. These include:

  • Individuals must be at least 22 at the time of application and not more than 65 years at the time of loan application
  • Individuals must be either self-employed or operate a proprietorship, private limited companies, and partnership firms 
  • Individuals who have been engaged in the current business for at least three years with a total of five years of business experience
  • Enterprises with a minimum turnover of Rs. 10 Lakhs.
  • Enterprises making profits for the past two years.
  • Enterprises with a Minimal Annual Income (ITR) of Rs. 2 Lakhs per year.
Must Read: What are the Business Loan Benefits & Advantages?

Documents Required for a Business Loan:

The list of documents required for a business loan are:

  • Recent photograph
  • Valid Identity Proof such as PAN card, Driving License
  • Valid Address Proof such as Electricity bill, Passport
  • Bank statements
  • GSTR or ITR
  • Income proofs
  • Proof of Business existence (like Certificate of Incorporation, etc.)

Filling Out the Application Form: Click on the “Apply button” on this page and select “Business loans”. Fill out all the relevant and mandatory sections with information that is accurate to the best of your knowledge.  A representative will get in touch with you to understand your requirements, assess your eligibility and take the application further.

You will get a reference number that can be used for future communications. Our dedicated teams will verify the documents and the application and approve the loan within 2 to 3 business days.

If you still have questions, feel free to get in touch with our Fullerton India customer service team on the toll-free number 18001036001. Alternatively, you can email us at [email protected] for more information.

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