When it comes to business financing, two common options are term loans and overdraft facilities. While both provide access to funds, they serve different purposes and repayment styles. At Vizzve, we want to make it easier for you to understand which option fits your business needs.
What Are Term Loans?
A term loan is a fixed amount of money borrowed from a bank or financial institution, repayable over a set period in regular EMIs. Term loans are typically used for large capital investments like machinery, expansion, or property.
Pros:
Predictable repayments with fixed tenure.
Ideal for long-term investments.
Builds credit history.
Cons:
EMIs start immediately, even if funds aren’t fully utilized.
Less flexible once sanctioned.
What Are Overdraft Facilities?
An overdraft (OD) facility is a credit line linked to your current account. It allows you to withdraw more money than you have in the account, up to a sanctioned limit. Interest is charged only on the amount used, not the full limit.
Pros:
High flexibility in managing cash flow.
Interest payable only on utilized amount.
Quick access to funds when needed.
Cons:
Usually requires collateral (like fixed deposits, property, or receivables).
Limits may be smaller than term loans.
Key Differences Between Term Loans and Overdrafts
| Feature | Term Loans | Overdraft Facilities |
|---|---|---|
| Purpose | Long-term investment | Short-term cash flow |
| Repayment | Fixed EMIs | Flexible, pay as you use |
| Interest | On the full sanctioned loan | Only on utilized amount |
| Flexibility | Low | High |
| Collateral | Sometimes required | Often required |
How to Choose the Right Option
Go for a Term Loan if:
You need funds for fixed assets or expansion.
You’re comfortable with long-term EMIs.
Go for an Overdraft Facility if:
You want flexibility for working capital management.
You prefer paying interest only on what you use.
Why Vizzve?
At Vizzve, we simplify financing by helping you compare term loans and overdraft facilities from trusted lenders. With transparent terms and quick approvals, you can focus on growing your business while we handle the complexity.
Bottom Line
Both term loans and overdraft facilities have unique benefits. The right choice depends on whether you want predictable long-term funding or flexible short-term cash flow. With Vizzve, you can confidently choose the solution that works best for your business.
FAQs: Term Loans vs. Overdraft Facilities
Q1. Which is cheaper—term loan or overdraft?
It depends on usage. Overdraft can be cheaper if you borrow occasionally, as interest is charged only on the utilized amount.
Q2. Do overdraft facilities affect my credit score?
Yes, just like loans, timely repayment of overdrafts helps build a strong credit history.
Q3. Can I switch from a term loan to an overdraft?
Not directly, but Vizzve can guide you through refinancing or restructuring options.
Q4. What collateral is required for overdraft?
Typically, banks accept fixed deposits, property, or receivables as security.
Q5. Can businesses apply for both term loans and overdrafts?
Yes, many businesses use term loans for expansion and overdrafts for working capital simultaneously.
Published on : 30th September
Published by : SMITA
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