How to choose between a term loan, overdraft, and cash credit facility
Indian businesses have access to multiple forms of bank financing, each suited to different needs. Choosing the wrong product costs you money — either in unnecessary interest or in a facility that doesn't actually solve your cash flow problem.
Term loan: a fixed amount, disbursed upfront, repaid in EMIs over a defined period. Best suited for: capex (buying equipment, fit-out, vehicles), long-term working capital for a specific project, or a one-time need you can quantify. The interest rate is typically fixed or semi-fixed. You pay interest on the full outstanding amount regardless of whether you need all of it at once.
Overdraft (OD): a revolving facility against collateral (typically property). You draw and repay as needed, up to a sanctioned limit. Interest is charged only on the amount drawn, on a daily basis. Best suited for: general working capital management, smoothing cash flow fluctuations, and situations where your borrowing need varies. The rate is typically MCLR or repo-linked, floating with market rates.
Cash credit (CC): similar to overdraft but typically against hypothecation of stock and book debts rather than property. Suited for: businesses with significant inventory or receivables, especially in trading and manufacturing. Requires regular submission of stock and debtor statements to the bank.
Invoice discounting/bill discounting: advance against specific invoices or bills from creditworthy customers. Suited for: businesses with large B2B receivables from established counterparties. You receive 70–80% of the invoice value upfront; when the customer pays, you receive the balance less the bank's charges.
Working capital demand loan (WCDL): a short-term, fixed-tenure loan (typically 90–180 days) for a specific working capital need. Cheaper than overdraft if you know exactly how much you need and for how long.
The practical guidance: for capex, use a term loan. For ongoing working capital, use OD or CC. For specific receivables financing, use invoice discounting. Don't use a term loan for working capital — the rigid repayment schedule creates cash flow mismatches.