MSME owners often borrow on the wrong product simply because their bank pitched it first. Pick the right tool and your effective cost can drop by 3–5% a year.
Cash Credit (CC)
A revolving working-capital limit secured against current assets — inventory and receivables. You draw what you need, pay interest only on the utilised amount, and the limit is renewed annually based on a stock statement.
Best for: Trading and manufacturing businesses with predictable inventory cycles.
Overdraft (OD)
A revolving limit against your current account, typically secured by an FD, LAP or business turnover. Cheaper than CC for service businesses because there's no stock-audit overhead.
Best for: Service businesses, professionals and asset-light MSMEs.
Term Loan
A lump-sum disbursement with a fixed EMI schedule over 12–84 months. Cheaper than CC/OD on a like-for-like basis because the lender's risk is amortised.
Best for: One-time capex — machinery, expansion, fit-outs, refinance.
The right stack
Most healthy MSMEs run a CC or OD for daily liquidity and a term loan for any one-time investment. Using a term loan for working capital strands cash; using CC for capex inflates your effective rate.