Businesses borrow in two structures: a term loan (fixed amount, fixed EMI, fixed tenure) or an overdraft/cash credit (a limit you draw from as needed, paying interest only on usage). Picking the right one can save significant interest. Here is the comparison.
Fixed loan repaid via EMIs over a set tenure — best for planned, one-time needs.
A credit limit you draw and repay flexibly — best for fluctuating cash-flow needs.
| Feature | Term Loan | Overdraft / Cash Credit | Winner |
|---|---|---|---|
Interest Charged On OD saves interest when idle. | Full sanctioned amount | Only amount used | / B |
Repayment OD is revolving. | Fixed EMIs | Flexible — repay anytime | / B |
Interest Rate Term loans usually price lower. | 10.5%–16% p.a. | 12%–18% p.a. | / A |
Best For Match structure to need. | Planned one-time need | Fluctuating cash flow | / |
Tenure Term loans have a defined end. | 1–7 years | Renewed annually | / A |
Discipline OD needs discipline to avoid rolling debt. | Forces steady repayment | Risk of perpetual usage | / A |
Collateral Varies by lender. | Asset or unsecured | Stock / receivables / property | / |
OD saves interest when idle.
OD is revolving.
Term loans usually price lower.
Match structure to need.
Term loans have a defined end.
OD needs discipline to avoid rolling debt.
Varies by lender.
Take a term loan for a specific, one-time investment (buy an asset, fund expansion) — the fixed EMI aids budgeting and the rate is usually lower. Take an overdraft/cash credit when your cash needs fluctuate (seasonal business, receivables gaps) — you pay interest only on what you use, and repay flexibly. Many businesses use both: a term loan for capex and an OD line for the operating cycle.
Term loan wins — a one-time asset with a fixed EMI over a set tenure.
Overdraft wins — draw to cover the gap, repay when customers pay, and pay interest only on usage.
Term loan wins on rate for a defined, one-time requirement.
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