Choosing to seek funding for your business is a major step. But an even more important decision is choosing the right type of funding. It’s like picking a tool for a job: using a hammer when you need a screwdriver won’t work very well. Picking the wrong financial product can strain your cash flow, cost you unnecessary interest, and hinder your company’s growth.
The two most common funding tools offered by banks and NBFIs in Bangladesh are the Term Loan and the Business Line of Credit. They may sound similar, but they function in fundamentally different ways.
The warning in the title is there for a reason: making the wrong choice is one of the most common and costly mistakes an entrepreneur can make. This guide will break down the crucial differences so you can confidently select the right tool for your specific business needs.
What is a Term Loan (Meadi Rin)?
A Term Loan is what most people think of when they hear “business loan.” It’s straightforward and predictable.
- Definition: A lender provides you with a lump sum of cash upfront. You then repay this loan, plus interest, in fixed monthly installments (EMI) over a pre-defined period (the “term”), which is typically 3 to 7 years.
- Best For: Large, one-time, planned investments where you know the exact cost upfront. It’s for buying assets that will provide value to your business over several years.
- Common Examples:
- Purchasing new machinery for your factory.
- Buying a delivery truck or commercial vehicle.
- Financing a major office renovation or factory expansion.
What is a Business Line of Credit (Overdraft / Working Capital Loan)?
A Business Line of Credit is a flexible financial safety net. It’s less like a one-time loan and more like a powerful, reloadable credit card for your business.
- Definition: A lender approves a specific credit limit for your business (e.g., 20 Lakh BDT). You can draw any amount of money you need, up to that limit, at any time. You only pay interest on the amount you have actually used, not the entire limit. As you repay the amount you’ve drawn, your available credit is replenished, ready to be used again.
- Local Context: In Bangladesh, this product is very commonly known as an Overdraft (OD) Facility or a Revolving/Working Capital Loan.
- Best For: Managing ongoing, short-term operational expenses and covering unpredictable gaps in your cash flow.
- Common Examples:
- Buying inventory to stock up for the busy Eid or Puja sales season.
- Paying employee salaries while you wait for a large corporate client to pay their 60-day invoice.
- Managing day-to-day operational costs during a slow month.
Head-to-Head Comparison: Term Loan vs. Line of Credit
When to Choose a Term Loan: Scenarios
You should opt for a Term Loan when you have a specific, large purchase in mind.
- Scenario 1: You run a printing press and need to buy a new industrial printing machine for 40 Lakh BDT.
- Scenario 2: Your logistics company has won a new contract and you need to purchase two new delivery vans.
- Scenario 3: You are a manufacturer and need to build a new storage warehouse on your existing land.
When to Choose a Line of Credit: Scenarios
A Line of Credit is the right choice when your financial needs are ongoing or unpredictable.
- Scenario 1: You own a fashion house and need funds to buy fabric and pay workers for your upcoming Eid collection, knowing you’ll be repaid once the collection sells.
- Scenario 2: You run an IT service company. You just paid salaries, but your biggest client’s payment is 30 days late, creating a temporary cash shortfall.
- Scenario 3: Your business has fluctuating monthly sales, and you want a safety net to ensure you can always cover rent and utilities without worry.
Conclusion: The Right Tool for the Right Job
The choice between a term loan and a line of credit isn’t about which one is “better”—it’s about which one perfectly matches your business need. Using a long-term loan for a short-term cash flow problem will leave you paying unnecessary interest. Using a flexible line of credit for a large machinery purchase is an inefficient use of the product.
Understanding this difference is a hallmark of a smart entrepreneur. Don’t make the costly mistake of choosing the wrong one. Analyze your need, match it to the right product, and watch your business thrive.
Matching the right funding to your business goals is the key to sustainable growth. To understand which product fits your needs, connect with financing experts at PremiumLoanPlans.com.