When beginning to establish a business of your own, if you wish to propel your business forward without financial glitches in the nascent stage, you will initially require a large sum at your ready disposal to fund your start up. Even when planning to expand existing businesses, it is essential to have an easily accessible reserve of capital to avoid any interruptions in your plans. In such situations, Business Loans (BL) and/or Loans Against Property (LAP) come to your aid.
When running a business, you may encounter unforeseen events and unexpected expenditure. To fund such expenses, enterprises may need urgent short-term funds. Overdrafts (OD) are a predetermined amount that you may withdraw from your current account even after the balance has dropped to zero. Such a facility is often relied on for funds during unseen emergencies.
The main difference between Business Loans (BLs) or Mortgages/Loans Against Property (LAPs) and Overdrafts (ODs) is the time frame. BLs and LAPs are long-term arrangements, while ODs are used for short-term funding requirements. For this reason, BLs and LAPs are availed when either establishing a business or expanding it and ODs are usually made use of when unexpected expenditures arise and short-term funds are needed immediately.
Besides considering the purpose of your requirement, you must also take into account the volume of the funds you’ll need. BLs and LAPs allow businesses to borrow larger amounts. In ODs, businesses can borrow only up to the OD limit.
Moreover, you must consider whether or not you would be inconvenienced by changes in your borrowing structure mid-way. Taking BLs or LAPs makes cash flow planning more predictable. This is because you know the time and the amount that your business will be repaying. The scenario with ODs is different. Banks may change the limit at any given time and many even ask for the amount to be paid back sooner than expected.
BLs may be secured or unsecured but LAPs are by definition secured with your property. If you do not have property to offer as security but do have some assets – such as gold or shares – a BL may suit you. If you have no assets to offer as security, ODs may prove useful since they are secured only with your income.
The biggest advantage of a loan is that it does not have to be repaid by you if the company fails, as loans are lent to the corporate entity, not to you as the owner. In case the business is liquidated, the amount is used to pay back the borrowed loan. Business entrepreneurs often keep this aspect in mind while applying for loans.
That being said, ODs are flexible, which means that businesses may change the amount they wish to borrow, within limits. Furthermore, the interest paid is limited to the amount that is used and not the entire OD limit. Also, there is no fixed tenure for an OD. Businesses may close the OD any time they wish.
And thus, taking all of the above factors into account, you can easily decide which loan structure is most suitable to you.