When it comes to financing your business, you have many options at your disposal, including overdrafts. But how do overdrafts stack up against business loans? Which one is the best alternative? Keep reading to discover the answers to these questions.
What Is an Overdraft?
At the end of the day, an overdraft is simply a type of short-term loan. An overdraft happens when a person wants to make a purchase but they don’t have enough money in their account. So instead of preventing the transaction from going through, the bank lends money to their client.
With overdrafts, as with any other loan, you have to repay the amount you borrow plus interest and, in some cases, other additional fees. So be sure to understand all the conditions before using overdrafts as a business financing strategy.
Business Loans vs Overdrafts
As hinted earlier, overdrafts are a good alternative when you need to cover short-term needs that require a relatively small amount of capital. Some such needs may include purchasing materials, paying for repairs, buying insurance, or meeting payroll obligations.
If you have long-term expenses or need larger sums of money, a business loan is usually the best option.
For example, purchasing large fixed assets or real estate through overdrafts is out of the question. In that case, bank loans, or SBA loans (such as 7(a) loans or 504 loans) are the way to go.
Keep in mind that even if your business has short-term needs, the options at your disposal go well beyond overdrafts. For example, 7(a) loans can be used for a variety of purposes, including short-term working capital, refinancing business debt, or purchasing furniture and supplies.
And while overdrafts are a useful ace under your sleeve in an emergency, the fees associated with them can be high, so make sure to overdraft your account only when it makes sense.
If you need help figuring out the best financing tool for your business, contact our experts today by filling out this form, or tap the chat icon on our homepage to get in touch with an agent.
Gellyfish: Business Financing Made Easy
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