Business Loan vs Overdraft
Business loan vs overdraft — the working capital decision
Business loan = one-time disbursement, fixed EMI, interest from day 1. Overdraft = revolving limit, interest only on utilised amount. Pick by use case, not by habit.
Side-by-side comparison
Disbursement
Business loan: lump-sum on day 1. OD: approved limit; draw as needed.
Interest
Business loan: charged on full amount from day 1. OD: charged only on utilised amount, only for days used.
Repayment
Business loan: fixed EMI over fixed tenure. OD: flexible — draw and repay any time within the limit.
Tenure
Business loan: 1–7 years fixed. OD: 12 months renewable (reviewed annually).
Rate (indicative)
Business loan: 11–24% p.a. OD: 12–18% p.a. (typically slightly higher than equivalent term loan).
Best for
Business loan: one-time capex (machinery, expansion). OD: working capital swings, receivables bridge, festival inventory.
Documentation
Business loan: full pack (KYC + ITR + GST + banking). OD: similar, plus stock + receivables statement (for CC).
Prepayment
Business loan: 4–5% foreclosure penalty. OD: no penalty — pay down any time (revolving).
When to use which — by use case
- Buy machinery → business loan (one-time spend, long-life asset)
- Pay vendors during a 60-day receivables cycle → OD (revolving)
- Festival season inventory build-up → OD (peak need, then repay)
- Office renovation → business loan (one-time spend)
- Bridge a 30-day GST refund delay → OD (short-term, repay on refund)
- Expand to a new city → business loan for capex + OD for working capital
- Replace an old expensive loan → business loan (refinance)
- Bid for a large tender requiring bank guarantee → CC against margin
Cost comparison
₹20 L for 12 months — OD vs term loan cost
- Always need ₹20 L for 12 months → term loan cheaper (interest from day 1 either way)
- Need ₹20 L for 6 months, ₹0 for 6 months → OD much cheaper (interest only when used)
- Need ₹10 L average with ₹20 L peak → OD cheaper (interest on ₹10 L average)
- Need ₹20 L peak, ₹5 L trough → OD cheaper, but commitment fee may apply on unused
- Mixed use (some capex + some working capital) → term loan for capex + OD for working capital
FAQ
Common questions
Can I have both an OD and a term loan from the same lender?+
Yes — and it's often the optimal structure for MSMEs. A term loan for capex (machinery, expansion) plus an OD or CC for working capital. The lender sees both facilities, can underwrite them together, and may offer better combined terms than two separate lenders.
Is OD interest calculated daily?+
Yes — OD interest is charged on the daily utilised balance, typically debited monthly. This makes OD significantly cheaper than a term loan if your utilisation is irregular. The trade-off: most ODs have a 12-month renewable tenure, vs a term loan's fixed multi-year tenure.
What's the difference between OD and Cash Credit (CC)?+
OD is a generic overdraft against your banking relationship or collateral. CC is specifically for working capital against inventory and receivables — the lender sets a 'drawing power' based on your eligible current assets. CC tends to be cheaper (lower rate) but requires monthly stock/receivable statements. OD is simpler but often at a higher rate.
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