Every growing business hits the same question: should you borrow a fixed amount and repay it in EMIs, or keep a credit line you can draw from whenever cash runs short? Both are collateral-free options, but they suit very different needs.
The short answer
Choose a term loan for a one-time, planned spend like machinery, a new outlet or a large order. Choose a Flexi OD (overdraft) for recurring, unpredictable working-capital needs like stock, supplier payments or gaps while you wait to get paid.
How a term loan works
The lender disburses the full amount upfront. You repay it in fixed monthly EMIs over an agreed tenure, and interest is charged on the outstanding principal from the first day.
- Predictable EMIs make budgeting simple.
- Good for spends with a clear payback, like equipment that raises output.
- You pay interest on the full amount, even on money that sits in your account unused.
How a Flexi OD works
The lender sanctions a limit. You withdraw what you need, repay when cash comes in and withdraw again. Interest is charged only on the amount you use and only for the days you use it.
- Ideal when your cash needs rise and fall through the month or season.
- In a Dropline OD, the limit steps down on a fixed schedule, so the line is gradually repaid over the tenure.
- Check the lender's Key Fact Statement for renewal fees or charges on unused limits.
Side by side
| Term loan | Flexi OD | |
|---|---|---|
| How you get the money | Full amount upfront | Draw as needed, up to your limit |
| Interest is charged on | The full outstanding principal | Only the amount you use, for the days you use it |
| Repayment | Fixed monthly EMI | Flexible within the limit and tenure |
| Best for | Machinery, expansion, a large order | Inventory, supplier payments, seasonal gaps |
| Watch out for | Interest on money that sits idle | Renewal terms and charges on unused limits |
Which one should you choose?
Ask yourself three questions:
- Is the need one-time or recurring? One-time points to a term loan. Recurring points to an overdraft.
- Do you know when the money comes back? If receivables are irregular, an overdraft lets you repay as cash arrives.
- Will borrowed money sit idle? If yes, an overdraft usually costs less because you pay only for what you draw.
Key takeaways
- Term loan: a lump sum and fixed EMIs, for planned one-time spends.
- Flexi OD: a reusable limit with interest only on what you use, for working capital.
- Many growing businesses use both: a term loan to expand and an overdraft to run day to day.
This guide is for general information only and is not financial advice. Loan terms, rates and charges are set by the lender and shared in your Key Fact Statement.