Business loan versus overdraft: which is the best option?

Most businesses need to borrow money at some point in their life cycle, whether that’s to get off the ground, push through a slow patch or finance an expansion. There are many options out there to provide that cash, even if actually securing the money isn’t always easy.

The variety of choices can be bewildering, especially for new entrepreneurs, and one question that many ask is: “what is better, a business loan or an overdraft?” Not surprisingly, the answer depends on your needs.

If you are considering borrowing money for your business, you should have a pretty good idea what it is for. Ideally, you will have mapped out the costs involved in your plans, and the likely benefits once they are in place. This will help you decide whether it’s worth borrowing at a certain rate, and what kind of financing will work best for you.

Overdrafts

An overdraft is when your bank allows you to keep withdrawing money even when your account is empty – to an agreed limit. This means that you can borrow exactly as much as you need at any given time, automatically repaying some of the debt when your invoices are paid.

Although there may be other charges associated with an overdraft such as monthly fees for your account or annual set-up fees, if you’re only borrowing money occasionally and/or for short periods of time, this makes an overdraft a very useful form of financing for many businesses. If you’re an established business, you may have an overdraft with your bank already.

Because of the flexibility it gives to working capital, many businesses may opt to have the option of an overdraft even if they rarely need to borrow. But it is not likely to be the best option if you need to borrow a relatively large amount for a longer time, as the interest that is charged will probably be quite high.

Business loans

If you know what you want to borrow and how long it will likely take you to repay the sum, a business loan may be a better option. But you will have to be clear about your plans, because you will be borrowing a fixed sum for a fixed time, with regular re-payments at agreed times.

One major problem with business loans can of course be securing one: even with a good business plan, in the present climate many entrepreneurs see their applications turned down. However, at DSL Business Finance, we offer loans of up to £50,000 to enterprises based in Scotland, even those who may have been turned away by mainstream lenders.

To find out more about how a DSL Business Finance loan could help you to achieve your goals click here.