The bank wants me to take out a term loan, rather than an overdraft, to help finance my business. What is the difference, legally and practically?
A term loan is the loan of a fixed sum over a fixed period of time, with regular payments of interest and repayments of capital. Both the interest payments and the capital repayments may be postponed over a given period - for example, the first year of the loan - but once they begin they have to be maintained. Providing that the payments are maintained, the bank is legally committed to letting the loan run for the full period - it cannot be called in early.An overdraft is a much more flexible arrangement on both sides. You will be given an overdraft limit on your business account, and may borrow up to that limit at any time while it remains in force. However, the bank is entitled to withdraw your overdraft facilities without notice, which means that you could find yourself required to refund these borrowings on demand.
Banks tend to think of term loans as a method of financing specific investments, whereas overdrafts are intended to cover fluctuations in working capital.
Related Resources
in the Legal Information Centre
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