Difference between Term Loan and Overdraft

India is witnessing the rise of new kinds of enterprises and they are becoming very important for the growth of Indian economy. Yes, we are talking about the small and medium enterprises or the SMEs, as they are popularly abbreviated. There are about 48 million SMEs in the Indian market and they have been witnessing a growth rate of 18% to 34% in average per year.

The development of the SMEs is very important for the growth of Indian economy and for a developing country like India to achieve an average growth rate of 8%-10% a year for its economy; it needs a very powerful sector of SMEs.

Mostly, the SMEs are start-up organizations which start their journey with the investment from its founding members but it is never possible for few people to bear the expenditure of an SME for long thus they turn up to various financial institutions or banks for availing financial aid. Now the two most popular financial solutions for SMEs that they particularly look up to are the overdraft and the term loans.

But the difference between these two financial terms is still not clear to most of the people; that are why we have decided to shed some light upon them. Do you want to know what the differences between the term loans and overdrafts are and what is the best choice for your company? Let us find out then.

Overdrafts

There may come a time when you can actually run out of funds and your bank account gets totally barren without a time to spend, that is when the overdrafts come in handy.

What is an Overdraft? Well, an overdraft is nothing but an extension provided on the credit by a financial institution or a bank.

Under this special arrangement of overdraft, you will be able to withdraw money from your account through cheques or other withdrawal processes. But here one thing that you should keep in mind that the credit is extended by the bank or any monetary institution up to a certain limit known as the overdraft limit; once that limit is exceeded, you will not be able to withdraw money any further. The arrangement of paying the interests is similar to that of the other financial loans.

But here is a twist as the overdrafts are of revolving nature thus instead of repaying the borrowed amount within a fixed time period, you can actually keep on borrowing the money and repaying it simultaneously. This is the reason why overdraft is also known as the revolving line of credit. The overdraft facility is generally awarded to SMEs for a year but if you maintain a good rapport with the financial institution and timely repay your debts then this service can be renewed every year. Due to its revolving nature, the overdrafts have proved to be efficient financial solutions for SMEs.

Term Loans

As the name suggests, the term loans are given for a medium to a long period of time which ranges from one to ten years. The term loans allow you to borrow a bulk amount of money from the financial institutions or banks and to repay it over time along with fixed interests calculated on the amount of money remaining to be paid back.

For availing this kind of loan, the SMEs require keeping properties or any fixed asset as a mortgage to the bank or the financial institution. The amount of money that the small and medium enterprises will receive totally depends on the value of the properties or assets that they are keeping in the mortgage.

Can you avail both the term loans and overdrafts?

There comes a time when you will need all the pecuniary help you can get, you will need both the term loan and overdraft. To be honest, if you have a good history of repaying the debts timely without any fault and the operations of your company are totally transparent then the financial institutions will deem as trustworthy and will provide you with both the overdraft and term loan services.

So, if you are going through financial business crisis in that condition, it’s always prefer to go and avail the term loan or overdraft which suits to you and your business need and help you to get off from the problem.

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