Which is a better option between an Overdraft and a Business loan?

Which is a better option between an Overdraft and a Business loan?

Businesses require funding on and off to sustain and meet the ever-growing demands of their day to day expenses or even to prepare for a long term future. One may choose from a business loan, dropline overdraft loan, overdraft loan, working capital loans or loan against property as potential funding options depending on the business requirements. It is imperative to understand the meaning and significance of different financial options before choosing the one.

Herein we overlook business loan and overdraft as funding options for businesses so that you can make a wise and more informed decision.


Business loans are the most sought after loans which do not require any collateral. One can use the funds to meet the unending expenses of the business like working capital, growth and expansion of business, buying stock and inventory, buying machinery, recruiting and training staff etc. One can get access to a bigger loan amount if they offer collateral against the loan amount.

Features of a business loan

  • It is a borrowed amount incurring a rate of interest which varies from one lender to another.
  • The loan amount can be repaid in easy instalments.
  • It is a long term facility.
  • The interest is calculated monthly.
  • The business loan amount is dependent upon your credit score, business needs and applicants credentials.
  • The borrower need not have a bank account with the lender to avail a business loan.


An overdraft, on the other hand, is a credit facility which can be availed on your current account wherein you can withdraw money which is not even in your account. This allows you to withdraw even if you have zero balance. The bank charges the interest on the extra amount which is withdrawn from the current account. This rate of interest varies from lender to lender. With an overdraft, you can avail extra funds time and again. It is like you repaying the overdraft just to use it sometimes else.

Features of an overdraft

  • It is a credit facility.
  • The interest rate is charged on the over-withdrawn amount.
  • It is a short term funding facility.
  • The interest is calculated on a daily basis.
  • The amount which can be withdrawn depends upon your relationship with the bank and your current account.
  • Repayment of the loan can be done through your bank deposits.
  • For availing the overdraft facility, the borrower must be having the current account with the lender.


  • Loan amount required: If you wish to avail a loan of a higher amount, then a business loan is the most viable option. The lender will fix a rate of interest and you will be bound by a monthly repayment schedule for a defined loan tenure. An overdraft, on the other hand, can be availed to take care of short term financial needs and comes with flexibility in repayment terms. Business loans if secured can be availed for a bigger amount and lower rate of interest.  However, there is no such option to attach an overdraft along with the overdraft.
  • Rate of interest: the Interest rate on overdrafts is usually higher than the business loans and is charged on a daily basis unlike business loans wherein the rate of interest is fixed for the loan tenure.
  • Application: To avail a business loan, the process involves filling in the application form and submitting the requisite documents wherein to avail an overdraft, the applicant needs to request for the same by submitting a written application with the bank. Sanctioning the overdraft facility is the sole discretion of the bank and your relationship with the bank and the bank manager also plays a role in the same.

Business loan and overdraft have their own plus and minuses. It is important for the borrower to carefully go through the terms of both and avail the credit facility based upon their immediate needs and requirements. On one side is a business loan which encompasses a bigger spectrum of financial expenses of the business and on the other hand is an overdraft which is flexible, durable, reusable and comes with ease and convenience factors attached.

Read More: Dropline overdraft – How are they different from the standard loan?

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