Mr. Shankar owns a business of medical devices. At present, he sells in North India only but has plans to expand. To launch his products in South India. He ha applied to the bank for enhancement of the Overdraft limit for 50 lakh to 1 Crore. Bank Manager suggested him to take "Term Loan" of 30 lakh. Why do you think Mr. Shankar has applied for enhancement of overdraft limit? Do you think he should consider Term loan instead of Overdraft limit? *
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Mr. Shankar can consider taking the term loan for his venture.
- A term loan is paid back over a definitive time period on regular basis. They are generally for one to ten years but can be longer as well.
- Because he intended to start a new firm, he should take out a term loan. Because starting a new business entails some risk, my suggestion to him is to go for a term loan rather than an overdraft limit.
- He may have requested an overdraft loan because he believed that if he needed money in an emergency, he would be able to access it sooner than after the firm was formed, therefore he requested an overdraft limit.
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