A term loan charges interest on the full sum from day one, an overdraft only on what you draw, and choosing wrong is expensive.
Most SME owners ask their bank for a loan, because loan is the word everyone knows. A good relationship manager will ask what the money is for and quietly redirect the application. A busy one will process what you asked for, and you spend the next few years paying interest on money you did not need to borrow yet.
The choice between a term loan and an overdraft is the most common avoidable mistake in Malaysian SME applications. These are not two flavours of the same thing. They are priced differently, charged differently and reviewed differently, and the one you ask for tells the bank something about how well you understand your own cash cycle.
A term loan is a fixed sum, released once, repaid over an agreed period in monthly instalments of principal and interest. You cannot redraw what you have repaid. Borrow RM500,000 over five years and the bank disburses RM500,000 on day one, at which point you owe all of it.
An overdraft is a limit attached to your current account. Nothing is disbursed. The limit sits there and the account is permitted to run negative up to it. You draw it by paying suppliers and wages, you repay it by banking receipts, and the balance moves every day. There is no instalment schedule. The facility is reviewed annually and the letter will say it is repayable on demand.
This is the part worth reading twice.
On a term loan, interest accrues on the outstanding principal from the day of disbursement. The balance reduces as instalments are paid, so the interest charge falls over time, but you are charged on the full sum during the early months whether the money is deployed or idle. Draw RM500,000 in January for a machine you will only order in August, and you have paid seven months of interest on RM500,000 of nothing.
On an overdraft, interest is calculated on the closing balance each day and charged monthly. Draw RM120,000 for eleven days and you are charged on RM120,000 for eleven days. Keep the account in credit for a month and that month costs nothing in interest. You are paying for use rather than for availability.
Which sounds as though the overdraft always wins. It does not, for two reasons. Overdraft pricing is normally higher, typically a wider spread over the bank’s base rate than a comparable term loan, and some banks add a commitment fee on the unutilised portion of the limit along with an annual review fee. If you are going to sit at the top of the limit every day for five years, you are paying the higher rate on the full amount and the loan would have been cheaper.
| Aspect | Term loan | Overdraft |
|---|---|---|
| Amount | Fixed sum, disbursed once | Standing limit, drawn as needed |
| Interest charged on | The full outstanding from day one | The daily drawn balance only |
| Pricing | Usually the lower rate | Usually the higher rate |
| Repayment | Fixed monthly instalment | No schedule, moves with trading |
| Tenure | Agreed years | Annual review, repayable on demand |
| Other charges | Possible early settlement charge inside a lock in period | Annual review fee, sometimes a commitment fee on the unused portion |
| Security | Often tied to the asset being funded | Usually property, deposit or a debenture, plus guarantees |
Credit officers treat the facility you ask for as evidence about the business, not just as a preference.
Ask for an overdraft to buy a lorry and the file reads badly. An asset with a working life of several years funded by a facility repayable on demand is a mismatch the bank has to correct later at your expense. It also raises the obvious suspicion that the limit will end up funding something else.
Ask for a term loan to cover a seasonal gap and the problem is quieter but still expensive. You borrow for three years to solve a four month problem, the surplus sits in the account earning nothing, and the instalment becomes a fixed monthly outflow in exactly the months when trading is slow.
There is a third reading, and it is the one that costs limits at review time. Banks watch for hardcore borrowing, an overdraft that never returns towards zero. If the account has not touched a credit balance in a year, the bank concludes the limit has become permanent working capital rather than a swing facility, and the usual outcome is a request to convert part of it into a term loan rather than an increase. That is not a punishment. It is the bank matching the structure to the reality, which is what should have happened at the start. Our note on why banks decline SME applications covers how judgements like this get recorded and carried forward.
Look at twelve months of your current account. If the balance crosses from negative to positive and back several times a year, you have overdraft behaviour. If it goes down and stays down, you have a term loan need that an overdraft is currently hiding. The statements answer this faster than any forecast you can build.
Four questions, answered honestly, settle it in most cases.
Where the answers split, the honest description is usually that you have a dated capital need and an irregular trading swing at the same time. That is a normal structure and banks are comfortable with it: a term loan for the asset, and a modest overdraft or working capital line for the swing. Asking for both, with each amount justified separately, reads far better than asking for one large round number and being vague about its use.
Some needs are shaped like neither facility. If the gap exists purely because customers pay on 60 or 90 day terms, invoice financing is often easier to approve than either, because the bank is assessing your customers alongside you. If the money is for imported stock, a trade line funds the shipment directly and is usually cheaper. If the business is loss making, a facility of any shape funds the loss rather than fixing it, and a bank that declines is probably doing you a favour.
Where you have already been declined for one facility, applying for the other at the same bank rarely helps on its own, because the underlying assessment has not changed. What changes the assessment is a structure that matches what the money is actually doing, supported by numbers that hold up. SMEBox reviews the position, explains which facility fits, then prepares and submits the application to the lender most likely to consider it. The decision stays with the bank. You can read more on the term loan and overdraft pages.
Per ringgit borrowed, usually not. Overdraft pricing normally carries a wider spread over the bank’s base rate than a comparable term loan, and some banks add a commitment fee on the unused portion plus an annual review fee.
It can still cost you less in total, because you are only charged on the days and the amounts you actually draw. An overdraft used for a few weeks each quarter can be far cheaper overall than a term loan charging interest on the full sum for years.
Yes, and it is a common structure. A term loan funds the dated, known requirement such as equipment or premises, and a smaller overdraft covers the irregular swing in the current account.
Banks generally prefer this to a single oversized facility, because each limit has a stated purpose and a stated repayment source. Both are assessed together, so the total exposure still has to be serviceable.
It describes an overdraft that never returns towards a zero or credit balance. The account sits close to the limit month after month, which tells the bank the borrowing has become permanent rather than a temporary swing.
At annual review this usually prompts the bank to ask that part of the limit be converted into a term loan with a repayment schedule. It can also count against a request to increase the limit.
Normally because the purpose you described looks like a recurring trading gap rather than a one off, dated need. The bank is matching the structure to the cash flow it can see in your statements.
It can also happen where the security available supports a revolving limit more comfortably than a long tenure loan. It is worth asking the bank directly which reading applies, because the answer tells you what the file looks like from their side.
If you want to work out what this means for your own application rather than in general, that is what the first conversation is for. It costs nothing and we will tell you if the answer is that you are not ready.
The facilities Malaysian banks actually offer for working capital, what security they take, and how a credit officer arrives at your limit.
The six reasons credit officers actually decline SME files, whether each one can be fixed, and roughly how long fixing it takes.
How advance rates, factoring, recourse and debtor concentration work in Malaysia, and how to compare the real cost against a term loan.