Is an Overdraft Facility Better Suited for Your Business Than a Term Loan?

In today's fast-paced and competitive world, businesses often need access to funds to navigate through various financial needs. The most common source of financing for businesses remains loans. However, how to choose if your business needs the consistency of a term loan or the flexibility of an overdraft facility?

Both have advantages and disadvantages, but here, we will explore the benefits of an overdraft facility and analyze whether or not it could be a better option for your business than a traditional or term loan.

What is an Overdraft Facility or Overdraft Loan?

An overdraft facility is a type of loan option provided by lenders to their customers, allowing them to withdraw money based on their convenience from a pre-determined limit. This flexibility can be beneficial for businesses that experience fluctuations in cash flow throughout the year or have seasonal income variations. An overdraft is typically a short-term financing option that can be used to cover day-to-day operational expenses or unexpected costs.

Advantages of Overdraft Facility:

1. Flexibility: One of the main advantages of an overdraft facility is its flexibility. Businesses can access funds as and when needed, up to a specified limit, without the need to reapply for a loan each time they require additional funds.
2. Cost-Effective: Overdraft facilities allow borrowers to withdraw and repay money based on their convenience from a sanctioned limit, with interest being charged only on the utilized amount. This gives customers the flexibility to pay less interest payment as opposed to traditional business loans.
3. Cash Flow Management: An overdraft facility can help businesses manage their cash flow effectively by providing quick access to funds during periods of financial strain.

Also Read: Understanding Overdraft Facility: A Simple Explanation

What is Dropline Overdraft?

A Dropline Overdraft is a financial tool that allows borrowers to withdraw cash from an agreed limit. The withdrawal limit decreases from the sanctioned amount at a set period, and interest is only charged on the withdrawn cash, instead of the total borrowing limit. Deposits can be made at any time to decrease the outstanding balance. Interest is calculated daily and charged at the end of each month.

For example: In a monthly dropline overdraft, if the initial tenure is 60 months and the original overdraft limit is INR 10,00,000, the operating limit will decrease by INR 16,666 each month. For example, after one month, the available limit will be INR 9,83,334. This reduction continues each month until the end of the repayment tenure.

Overdraft Facility or Term Loan: Which is better?

While overdraft facilities offer several benefits, they may not always be the best financing option for every business. On the other hand, traditional business loans like term loans provide a lump sum amount upfront, which can be useful for funding large capital investments or long-term projects. Additionally, business loans typically have a fixed term and repayment schedule, allowing businesses to plan their finances more effectively.

Read more: Overdraft Facility vs. Term Loans: Making the Right Financial Choice

How to choose if your business needs a term loan or an overdraft facility?

Purpose of Financing: Consider the specific needs of your business and the purpose for which you require funding. If you need short-term, flexible financing for day-to-day expenses, an overdraft facility may be more suitable. However, a term loan might be a better choice if you are planning a long-term investment or expansion project.

Cost of Financing: Compare the interest rates, fees, and terms associated with overdraft facilities and term loans. Calculating the total cost of financing can help you determine which option is more cost-effective for your business in the long run.

An overdraft facility can be a valuable financial tool for businesses looking for short-term, flexible financing options. However, it is important to carefully assess your business's financial needs and compare the benefits of an overdraft facility with those of a traditional business loan. Ultimately, the decision between an overdraft facility and a business loan will depend on your business's specific requirements, financial situation, and long-term goals.

What are Godrej Capital Flexi Funds?

Godrej Capital recently introduced Flexi Funds, an overdraft-like facility, that can be used by borrowers interested in opting for an unsecured Business Loan or secured loan options like Loan Against Property and Udyog Loan Against Property. Flexi Funds acts as a smart financing solution for businesses that require flexible access to funds. This facility provides five dropline variants, competitive interest rates, easy access to funds through an online portal, and financial agility to adapt to market conditions and seize opportunities confidently.

Dropline Options: Flexi Funds Variants

Also Read: Loan Against Property versus Loan Against Property Flexi Funds: Which One Fits Your Needs?

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements.
Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com