Borrowing money in the form of a business loan or overdraft is a normal process. Businesses rely on short and long term capital to fuel their growth. Without good debt, it is not possible to expand the capabilities of a business in a short time to meet immediate demands. Fluctuations and market dynamics require the use of debt as an instrument to build products and services on time. So there is no lack of this opportunity to sell them at a good profit.
But there has always been debate or confusion over a business loan and overdraft. There are some overlaps between the two, but there are also a lot of unusual aspects. Although they can be used for the same purposes, they are created for different reasons.
What is a business loan?
Business loans can be secured or unsecured loans. They can be obtained from banks and non-bank financial companies. Various digital lending agencies, crowdsourcing companies, and lending institutions also offer business loan programs.
Secured business loan
A secured business loan is a loan that requires collateral as collateral. This form of security provides a level of predictability and stability for the lender. The lender is assured that even in the event of non-payment of the loan; the guarantee will provide the means to collect the debt. Collateral can be a combination of property, stocks, money market instruments, bank deposits, gold, etc. Secured business loans are generally larger amounts. For small business loans, banks do not necessarily ask for collateral. But this again depends on criteria such as the borrower’s profile, spending habits, credit history, etc.
Unsecured business loan
An unsecured Commercial loan is generally lower amounts. But this is not true in all cases. Some banks provide large unsecured commercial loans to large conglomerates, corporations, multinational corporations, industries, etc. based on their relationship with banks. If a business has a good history with a bank and the business wants a large business loan, the bank can make that loan without the need for collateral. It only depends on the existing policies of the banks, which may vary depending on the lending climate, existing banking rules, the need for liquidity in the economy, etc. An unsecured business loan does not require the borrower to provide collateral as collateral.
Structured business loan
A structured business loan is a loan that is granted in several phases. This is usually a large amount. As the business progresses, the loan is granted in installments. A structured business loan mitigates any initial risk for the bank. But the granting of the loan is in phases the bank has a visibility on the evolution of the company. The bank can then decide to release the next part of the commercial loan on the basis of the progress report sheet provided by the bank.
Unstructured commercial loan
A business loan made in whole and not in part is an unstructured business loan. The bank has full confidence in the company to carry out its expansion activities. At the discretion of the bank, an unstructured business loan is granted if the business needs all the money up front. This is especially true for some commercial projects where it is not clear how much money would be needed for each phase of the project.
What is an overdraft?
A business can have a checking account with a bank. The checking account is used for cash, online and check transactions. In a day, thousands of transactions could take place from that company’s checking account. Sometimes there could be a lack of funds. The company will have an overdraft facility which will ensure that even in the event of a shortage of funds, the overdraft amount is available for use. Therefore, short money is a type of debt that is used as a reserve currency when the principal funds are not sufficient. Overdrafts only bear interest on the portion of the money borrowed. This aspect is a huge difference between overdraft and business loan.
There are different types of overdrafts:
With such ease of overdraft, the company arranges in advance with the bank. The bank and the company agree on a benchmark overdraft limit. For businesses and individuals, the interest rate is 15-20%. Since an overdraft costs more than a business loan, you should use discretion when using it.
In this type of overdraft facility, there is no prior agreement on the overdraft limit. But overdrafts withdrawn are charged at higher interest rates. Unauthorized overdrafts are not very common although they do exist for certain types of business relationships between banks and companies.
Advances from the overdraft facility
● Manage cash mismatch
o Overdrafts are useful when a payment is due and the business does not have to worry about a failed payment. Even when there are insufficient funds in the bank account, any additional money needed to reimburse a seller or supplier can be recovered from the overdraft amount.
● Prevent bad checks
o Declined checks are illegal and could put a business in legal jeopardy. To avoid such situations, companies activate their overdraft facility. Thus, even in the event of a lack of funds, a check presented on his bank account will pass through the amount of the overdraft.
● Easy to manage
o Overdraft facilities or accounts are easy to manage. They require less paperwork and minimal documentation. Once activated, only the used portion of the overdraft credit is charged interest.
1. What do I need to take out for a small or large business loan?
You can take out a business loan for business expansion, business growth, or to maintain business momentum.
2. What is a line of credit in a business loan?
This is a pre-approved loan for business loan account holders with a bank or NBFC like Lendingkart.
3. What is a business term loan?
A commercial term loan is a regular loan with a fixed repayment schedule constituting an IME.
4. Which one has the higher interest rate? Business loan or bank overdraft?
An overdraft loan usually has a higher interest rate. It is only in rare cases that business loans will have high interest rates.
5. What is the eligibility for overdraft on a personal or business account?
Age criteria, personal or business income, repayment history, credit score are all taken into account for eligibility verification.
6. Why does an overdraft charge a high interest rate?
An overdraft is a type of unsecured credit in excess of the account holder’s qualifying base amount. Unsecured credit has a higher interest rate.
7. Can a business loan and an overdraft facility be used together?
Yes. But usually this is done using a different account. The same loan account is not used for an overdraft facility.
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