Difference Between Working Capital Loan and Term Loan

Working capital loans and term loans are two typical loan options for firms. You may pick a proper loan term based on your firm’s cash flow and liquidity needs. It all simply comes down to finance, whether it’s for corporate growth or meeting day-to-day tasks. Knowing everything about these loans allows you to make an informed choice.

Both loans provide helpful features and conditions to keep your firm’s tasks running smoothly. Business term loans are typically the best choice between these two, especially for high-risk projects. On the other hand, working capital loans are suitable if the firm needs nominal sums to cover operating expenses.

What is a working capital loan?

A Working Capital Loan is designed to help your business cover day-to-day operational expenses. This short-term loan provides a financial cushion to maintain positive cash flow, even when faced with temporary shortfalls or seasonal fluctuations.

Working capital is a vital source of funding for firms. This loan is the cash you get right away to cover the day-to-day expenses of your firm. It is often needed when your firm must pay its monthly rent, pay its workers’ wages, or meet particular seasonal needs that have arisen at the last minute. The aid your business gets from external funders allows it to return to work.

Common uses for Working Capital Loans include:

• Purchasing inventory
• Paying salaries and wages
• Covering rent and utilities
• Managing accounts payable

These loans typically have a tenure of 12 months or less and are often structured as revolving credit, allowing businesses to borrow, repay and borrow again as needed. A key advantage of this type of business loan is the minimal to no collateral requirement. Due to the smaller loan amounts and immediate nature of the funds, this financing often fetches higher business loan interest rates.

What is a term loan?

Term loans, as their name suggests, are loans that last for a more extended period, ranging from one to ten years. These loans are used when you need funding for bigger projects, growth prospects, or to buy new equipment or tools. They often include larger sums of cash than working capital loans, and as a result, they are paid off over a longer time.

A Term Loan, also known as a business term loan, is a type of financing that provides a lump sum amount to meet long-term business goals. These loans are ideal for capital-intensive purposes such as:

• Business expansion
• Purchasing equipment or machinery
• Renovating facilities
• Consolidating debt

As mentioned earlier, the interest rates on working capital loans are high. Yet, the interest rates on term loans continue to rise over time, so you end up paying more in interest on term loans than on working capital loans. You can access a business loan calculator, which may assist you in figuring out the entire payback, including interest and principal. Since this is a long-term loan, there is a lot of paperwork and processes. So, it’s not simple to get a term loan. 

Term Loans have a longer repayment period than Working Capital Loans, ranging from 1 to 15 years, depending on the loan amount, business profile and lending policies. This extended timeline allows businesses to spread out the cost of significant investments over a more manageable period.

They have fixed repayment schedules, either monthly or quarterly, with both interest and principal payments. Term Loans generally require collateral, such as property or equipment, and come with lower interest rates compared to Working Capital Loans due to their longer tenure and larger loan amounts.

Working Capital Loan and Term Loan are two distinct types of financing designed to meet different business needs. Let us understand the key differences between these two types of financing.

Comparison between Working Capital and Term Loans

FAQs

1. What is the main difference between a Working Capital Loan and a Term Loan?
   The main difference is the purpose and repayment timeline. Working Capital Loan are short-term loans for operational expenses, while Term Loan are long-term loans for significant investments and expansion.
2. What are secured loans?
   Secured loans are a type of business loan financing that requires you to pledge assets in exchange for funding.
3. Can I get a Working Capital Loan without collateral?
   Yes, many lenders provide unsecured Working Capital Loans and do not require you to pledge any tangible assets as security. However, lenders may still ask for personal guarantees or a charge on current assets.
4. How long is the repayment period for a Term Loan?
   Term Loans typically have a repayment period ranging from 1 to 15 years.
5. Are there any specific business loans for women?
   Yes, some lenders offer tailored business loans for women with favourable terms and reduced business loan interest rates. Some unsecured business loan options for women include Udyogini Scheme, Mudra Loan for Women and Mahila Udyam Nidhi scheme.
6. How can I apply for a Working Capital Loans or Term Loan online?
   Many lenders, like FlexiLoans, offer online business loans without collateral that allow you to quickly apply for desired financing in a completely digital process. Seamlessly submit applications for a Working Capital Loan or Term Loan in a few clicks and take advantage of quick approval and disbursal of funding.

Conclusion

A working capital loan is ideal if your firm only needs a small sum of money to pay day-to-day expenses. Furthermore, timely repayment of term loans may significantly boost firm credit because the approved sum is often relatively large. On the other hand, working capital loans do not improve credit scores. As a result, the financing you pick is based on the type of money you need.

You must identify the aim for which you seek a loan as well as the form of cash you wish to obtain. Once you’ve completed both, you may quickly apply for a loan via a reputable offline or online platform. 

The specifics of financing choices may differ from one banking firm to the next. Hence, before pursuing any loan choice, you should properly review the facts and benefits to maximise your advantages.

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