A. Term Loans

Term loans are short-term loans offered to businesses for capital expenditure and expansion among others. Generally having a tenor up to 5 years, these loans are tailor-made to suit the various financial needs of businesses. Minimal documentation, quick disbursal of funds, and flexibility in repayment are some of the major benefits of these loans.

Types of Term Loans:

Term loans are available in several varieties to suit a borrower’s funding requirements based on factors like

  • Amount of funding required
  • Repayment capacity of the borrower
  • Regular cash flow and in-hand availability of funds

Based on these, the term loan interest rates also vary along with other terms of lending. As per the term loan meaning, these advances are available in the following variants.

  • Short-term loans: Tenure ranges between 12 to 18 months and Some lenders, also consider advances of up to 5 years or 60 months as short-term loans. Borrowers usually avail these loans to meet their immediate, medium-sized funding needs that they can repay easily within a short span.
  • Intermediate-term loans: Tenure ranging between 3 to 5 years. Borrowers usually avail these loans for making big-budget funding needs of businesses like purchasing machinery purchase, boosting the working capital, etc. Affordable EMIs of these loans allow businesses to repay the loan from regular cash flow.
  • Long-term loans: Tenure reach up to 25 years and have attractive term loan interest rates. Easy EMI option makes these advances convenient to repay over the long tenor while fulfilling a business’s requirement for lump sum funding. Usually such loans are secured in nature.

Advantages of term loans:

  • Flexibility of tenor -With an option to choose a suitable tenor for loan repayment, borrowers can select a suitable term that allows them pay EMIs as per their repayment capacity.
  • Ease of repayment through affordable EMIs -Select a repayment tenor as per your income and keep your EMIs affordable.
  • Minimum eligibility requirements and hassle-free documentation –You can easily avail these loans against minimum eligibility and submissions of few basic documents, which makes the process hassle-free.
  • Cost of loan limited –You can have an idea of the total cost of loan you are required to pay during the application process itself. It makes budgeting your finances easier.

 Disadvantages of term loans:

Although term loans are among the best sources of external credit, they must be cautiously used to avoid landing in a detrimental financial circumstance. To do so, borrowers must –

  • Keep a track of due dates for EMI payment
  • Pay EMIs in time
  • Make optimum use of the loan amount

B. Cash Credit Loans

Cash Credit Loan means:

A cash credit loan is a short-term source of finance, and has a tenure of up to one year. It is categorized under the Working Capital Loan. Under the short-term finance option, the bank offers its applicant to take a loan up to a certain limit depending on their credit history.  This allows the customer, typically a business or company with a proven track record of profit, to withdraw money which is more than the balance available in their accounts. Cash credit loan is also known as Bank Overdraft facility.

Features of Cash Credit Loan:

  • Cash credit loan is given to meet the working capital requirements of a business
  • It is given against a collateral security.
  • Interest is generally charged only on the amount of loan taken by the customer and not on the amount of credit sanctioned
  • Cash credit loan is a short-term loan with specified monthly/quarterly repayment structure as decided by the lender
  • The applicant is allowed to withdraw the funds made available to him to meet the day-to-day working capital requirement by way of a running account
  • A cheque book is issued in the name of the company and they can withdraw funds as per the requirement
  • The applicant has the option to repay the loan as frequently as desired (daily/weekly), or as per the repayment structure is drawn by the lender
  • Even individual applicants can avail this type of facility against their fixed deposits (as a loan) and save on interest

Advantages of Cash Credit loan:

  • Ease of withdrawing only the amount as and when needed
  • It can be withdrawn any number of times within the given limit
  • Interest is charged only on the amount withdrawn
  • Quicker way of dealing with working capital shortages

Disadvantages of Cash Credit Loan:

  • Though interest is charged only on the amount that is utilized, the borrower would need to pay a fee for the facility that is made available
  • As it is considered as a business loan, extensive paperwork is required
  • If a bigger amount is obtained as a sanctioned amount, the business will need to pay a higher fee for the facility
  • The amount may be recalled at short notice. (This happens only when the repayments are not regular)

C. Overdraft Loans

Overdraft Facility is a financial instrument in which you can withdraw money from your savings or current account, even if your account balance is zero. This feature is provided by almost every financial institution, including banks and NBFCs. Overdraft facility a type of short-term loan to be repaid in defined tenure as required by the financial institutions. Lenders shall levy interest rate that the borrower needs to repay, as per the bank’s terms and conditions. The type of interest rate offered by lender is fixed and not floating.

Overdraft Account – Features:

  • Overdraft account is a facility that can be availed by maintaining any bank account
  • Several private sector banks are now offering this facility for both salary and savings account holders
  • The money extension is granted on the basis of customer’s account value, repayment history or credit score
  • It is short-term credit provided by the bank that needs to be paid within the stipulated time limit
  • Credit amount or overdraft attracts interest for the time of use which can be from a couple of days to a few weeks
  • Repayment tenure is decided by the bank and it has full authority over the account and its use
  • As per the RBI regulations, current accounts and cash credit accounts are eligible for a maximum of Rs. 50,000 per week

Advantages of an overdraft Loan:

  • An overdraft is flexible – you only borrow what you need at the time which may make it cheaper than a loan.
  • It’s quick to arrange.
  • There is not normally a charge for paying off the overdraft earlier than expected.

Disadvantages of an overdraft Loan:

  • If you have to extend your overdraft, you usually have to pay an arrangement fee.
  • Your bank could charge you if you exceed your overdraft limit without authorization.
  • The bank has the right to ask for repayment of your overdraft amount at any time, although this is unlikely to happen unless you get into financial difficulties.
  • Overdrafts may be secured against business assets.
  • Unlike loans you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.
  • The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.
  • Unutilised overdraft facilities may be reduced by the banks at short notice, although this is unlikely to happen unless you get into financial difficulties.