Difference between loans and overdrafts

Businesses need cash to thrive. As an entrepreneur, there are quite several options you may have to raise the cash. Some of these ways may be internally sourced from the organization through profits, cutting costs as well as other techniques. On the other side if you have no ways to source for cash you may opt to go to the external sector which is mostly based on lenders. The most common ways to raise finance externally includes loans and overdrafts. This you may take from your bank which you have an account with or from other money lending agencies.

What is the difference between the two? A loan is a form of capital finance from a money lending institution that gives you a fixed amount of money that you have to pay within a certain period with partial deposits at an agreed rate. Loans attract interest rates that have to match the lending cap set by the lender. For a loan, you can borrow as much as possible but is always on consideration of your relationship with the lender or your income statements.

They have to be assured of your viability to pay back what you are borrowing. On the other side, when it comes to an overdraft, its a set limit of borrowing on your current account. Its also a form of debt and you can go over an atm and make an overdraft and you will be charged for it. The major difference between the two is that for the loan you are given a fixed amount whereas in the overdraft there is a limit of borrowing.

If you are seeking a short term form of finance to borrow, always consider your bank overdraft if the money required will be enough as per the limit set. Loans are relatively wisely taken if you need to finance a bigger project and your overdraft is too little for it