The short answer
A term loan gives you a lump sum repaid in fixed EMIs — right for buying something. An overdraft or cash credit gives you a limit you draw on and repay freely, with interest only on usage — right for a cash flow gap. Using the wrong one is expensive.
Term loan
A fixed amount, disbursed once, repaid in equal monthly instalments over a fixed period. Interest is charged on the full outstanding balance whether or not you are using the money.
Right for: a machine, a new unit, a vehicle, a fit-out, an acquisition — anything where the money is spent once on something that will generate returns over years.
Overdraft
A limit on your current account that you can draw down and repay as often as you like. Interest accrues only on what you have actually used, calculated daily.
Right for: a working capital gap, seasonal swings, a buffer against delayed receivables. If you draw ₹10 lakh for eleven days and repay it, you pay eleven days of interest on ₹10 lakh — not a month’s EMI.
Cash credit
Similar in operation to an overdraft, but secured against your stock and receivables rather than against property or a deposit. The limit is usually set against a drawing power calculation, and you submit periodic stock and debtor statements.
Right for: trading and manufacturing businesses holding meaningful inventory, where the working capital need is structural rather than occasional.
The expensive mistake
Taking a term loan to solve a cash flow problem. You receive a lump sum, spend it plugging gaps, and are then left with a fixed EMI every month — added to a business that already had a timing problem. Six months later the gap is back and the EMI is still there.
If the need is timing rather than a purchase, you want a facility that flexes with the cycle.
What each costs
Overdrafts and cash credit usually carry a slightly higher headline rate than a comparable term loan, plus an annual renewal fee and sometimes a non-utilisation charge. But because you pay interest only on usage, the effective cost for a genuine working capital need is normally much lower.
The one discipline required: a limit is not income. A facility that stays fully drawn for twelve months has quietly become a term loan without a repayment plan, and lenders notice that at renewal.
Free, and it does not ask for your phone number.
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