Article
An overdraft or cash-credit limit is useful when the business has a timing gap: stock is bought now, invoices are raised later, customers pay after agreed credit days, and the cycle repeats. It should revolve with the business. If the limit is always fully used and never comes down, it may be funding structural margin weakness or poor collections instead of timing.
A term loan is better suited for assets, expansion, machinery, or planned investments where repayment can be mapped to future benefit. It is not ideal for plugging daily operating leakage unless the business has already fixed the leakage. Otherwise the founder converts an operating problem into a fixed EMI problem.
Before taking credit, run three checks. First, what exact cash gap is being funded? Second, what event will repay it - collection, stock turnover, new margin, or cost saving? Third, what happens if inflows are delayed by 30 days? If the answer is vague, approval may feel like relief but become pressure later.
The finance action: maintain a simple credit register with lender, facility type, limit, rate, collateral or guarantee, renewal date, EMI or interest cycle, security documents, and purpose. Review it monthly with receivables ageing and stock movement. Credit is not bad. Blind credit is.