Overdraft Loan Vs Term Loan

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Every firm has to be able to obtain finances whenever needed at a fair cost in order to succeed. There is therefore no one size fits all method for fundraising. Every business has distinct financial demands and requirements, and they can search for various financing options like an overdraft loan or a term loan. Even the financial institutions providing these money have their own predetermined criteria, financing amounts, terms, and conditions. Therefore, those wishing to borrow money from lenders can choose between overdraft loans and term loans.

Term Loan

A term loan is a loan that can be paid back to the lender over a fixed period. The interest rate will be charged or fixed which depends on the market fluctuation basically. To process this term loan you need minimum documents and the entire process is hassle-free.


  • An excellent credit rating is required for the candidate.
  • A reliable source of income is required of the applicant.
  • At the time of loan application, the applicant must be at least 21 years old, and at loan maturity, he or she may not be older than 65.
  • Various banks have different turnover requirements.
  • The last two years should have seen a profit for the company.
  • When applying for a loan, the borrower must present several sets of papers, each of which is specific to a given loan.

What are the various Term Financing options?

Term loans come in a variety of forms depending on how long they are granted for; one sort is the short-term loan, which is issued for a short period of time (less than a year). This is for businesses that don’t qualify for an overdraft or a line of credit. It could also be a long-term loan that is given for a lengthy period of time (somewhere between 5 to 25 years). An intermediate-term loan is between two, typically lasting more than a year and up to five years. Typically, the borrowing corporation is required to provide the bank with any of their assets as security.

Documentation Required

  1. A copy of your Business Registration
  2. The Applicant’s and the Company’s KYC’s
  3. For the last nine months, a Bank Statement
  4. Promoter’s PAN Card
  5. Promoter’s Aadhaar Card

Term Loan for Individuals and Small Businesses

Since these are long-term funds borrowed over a long period of time, the loan can be used for a variety of things, including company development, the purchase of equipment, raw materials, buildings, the payment of rent and salaries, etc.

Benefits of Term Loans

  • Choose a flexible Loan Repayment Period.
  • You may choose the length of your lease in accordance with your income to make it easier for you to pay the EMI.
  • The financing process was hassle-free and only a minimal number of documents were needed.
  • Obtain a term loan with a reasonable interest rate.

Drawbacks of Term Loan

  • It has a high interest rate
  • It requires several papers to qualify for the loan
  • It imposes numerous penalties so you are aware of all the commitments.

What kinds of firms are eligible for Term Loans?

Companies from any industry, from steel to IT, are eligible for a term loan for a variety of reasons. These term loans are available to all types of enterprises, including start-ups and single proprietorships. These loans may be used for acquiring assets, establishing a new facility, managing a shortage of operating cash, paying off current debt, etc.

Overdraft Loan

Overdraft Loan is a facility in which the current account holders with the bank can withdraw more than the effective credit balance in their current account. The interest rate on overdraft facilities charged only on the amount withdrawn by the user. This overdraft facility is also commonly known as a credit line facility.

Overdraft – Advantages

  • It is excellent for seasonal businesses since it allows you to make up for cash flow shortfalls.
  • Only the withdrawal amount is subject to interest payments.
  • You may apply at any moment if you currently have an account.
  • Less paperwork is needed.
  • It may be accessed with great flexibility, and the interest rate is reasonable.

Overdraft – Disadvantages

  • There is a chance that the cap will be lowered.
  • The increased interest rate on the cap.
  • A steep penalty cost must be paid if you exceed the limit.


  1. Proof of business registration
  2. Applicants’ and businesses’ KYC papers
  3. Last nine months’ worth of bank statements
  4. A minimum monthly income is required of the applicant
  5. Their CIBIL rating ought to be good.
  6. The applicant must possess a current identification document (PAN card, passport, aadhar card, driver’s licence) and a document proving their address (ration card, passport, and power bill).
  7. Last three months’ worth of payslips

Differences between Loan and Overdraft

1MeaningThe loan refers to the fixed amount of money borrowed for a specified period, against a guarantee, which should be repaid with interest.Overdraft is an arrangement whereby the customer is authorized to withdraw an amount greater than the balance shown as a credit in the current account, but only up to a certain limit.
2Security or CollateralIn the case of overdraft facilities, no security or collateral is required.Term loan can be both secured and unsecured.
3What is it?Borrowed capitalCredit facility
4ProcessAn overdraft facility can be availed easily, as it does not require much paperwork and the amount is readily available. It is a one-time process.In the case of a term loan, minimal documentation is required and disbursal is easy.
5Source ofLong-term fundsShort-term funds
6Purposes1. Buying an Machinery
2. Construction
3. Hiring new Staff
4. Paying old Debts
1. Wages
2. Bill Payments
7InterestCharged on loan sanctioned.Charged on amount overdrawn.
8Calculation of interestMonthly basisDaily basis
9Credit FacilityThis is a credit facility offered by financial institutions having different terms and conditions on which interest is charged.  The same is the case with term loans
10RepaymentEither on demand or on fixed monthly installments.Through deposits in the bank account.
11Is bank account Mandatory to avail benefit from this service?No, it is not compulsory.Yes, he / she must have a current account in the respective bank.
12Interest Rate CalculationInterest rate is calculated on Monthly BasisInterest rate is calculated on Daily Basis
13Current AccountIt is not mandatory to have current accountMandatory to have current account
14LimitHere, different credit limits are assigned to different customers, and any required amount can be withdrawn within the limit.In the case of a term loan, the amount cannot be modified, and the customer can avail only the sanctioned amount. 


The answer to this question may vary depending on the particular situation and company requirements. In certain cases, an overdraft might satisfy the requirements; in these cases, there’s no need to apply for a term loan because they entail a sizable sum that could become a burden. On the other hand, some costs and requirements can only be met through a term loan. For instance, if a company wants to expand, buy land, or buy machinery, it might use a term loan because the costs are high and the repayment time is set.

Overdraft loans are frequently praised as being safe and simple to get, and they are seen to be a better option for handling modest and temporary needs, such as marketing and advertising costs, salaries, rent, taxes, or other running costs, which typically last for 15 days to six months. Look for overdrafts that have lower interest rates and fees and that have more flexible repayment and borrowing alternatives. Loans are frequently thought of as planned emergency finances, whilst overdrafts are thought of as emergency ones.