Key Differences
Term loans, cash credit, and overdrafts are all financing options available to businesses, but there are some key differences between them.
Purpose:
Term loans are used to finance long-term capital investments, while cash credit and overdrafts are used to finance short-term operational expenses.
Repayment:
Term loans are repaid over a set period, while cash credit and overdrafts are repaid as and when the borrower needs funds.
Interest Rates:
The interest rate on a term loan is usually fixed, while the interest rate on cash credit and overdrafts is usually variable.
Credit Limit:
A term loan provides a lump sum of money, while cash credit and overdrafts provide a revolving line of credit that the borrower can draw from as needed.
Collateral:
Term loans and cash credit usually require collateral, while overdrafts may or may not require collateral depending on the creditworthiness of the borrower.
In summary, each of these financing options has its unique features and advantages. Businesses should carefully consider their financing needs and choose the option that best meets their requirements. A term loan is ideal for long-term capital investments, while cash credit and overdrafts are suitable for short-term cash flow requirements. It is important to compare interest rates, repayment terms, and other features of these financing options before making a decision.