Business Term Loan And Working Capital Loan: What’s the Difference?

Business term loan and the working capital are the two different term for business loan. Read to understand the difference between them.

2 Nov,2022 17:23 IST 8 views
Business Term Loan And Working Capital Loan: What’s the Difference?

Every business needs capital to ensure the smooth running of its day-to-day activities. However, it depends on when you need to take the loan. It may be for the long term to ensure the business sustains, or it could be short-term to ensure the company successfully navigates through a cash crunch.

What Are Term-Loans And Working Capital Loans?

A business term loan provides capital to the business owner for the long term, usually anywhere for a tenure between 1-10 years. These types of loans are taken by business owners when they want a high amount of capital to expand their business into new territories or business segments.

A working capital loan is a short-term financing product business owners take to fulfil their short-term capital requirements. These loans have a tenure of several months, and a business owner can use the loan amount to cover expenses related to the business's day-to-day operations.

Business Term Loan And Working Capital Loan: What’s the Difference?

Numerous differences between a term loan and a working capital loan may influence your business operations. Here are the distinctions between a term loan and a working capital loan:

Purpose

A term loan generally covers massive expenses such as buying machinery and office equipment, renovating office premises, buying real estate or opening a new office. On the other hand, the primary purpose of taking a working capital loan is to have positive cash flow during a cash crunch to cover day-to-day expenses.

Duration

Term loans generally have a tenure of 1-10 years or more to ensure effective repayment of the high capital amount. A working capital loan is a short-term financing product with a loan tenure of several months as the loan amount is lower.

Amount

Business owners opt for term loans when they want to raise a higher capital amount. A working capital loan offers a smaller amount ideal for short-term business expenses.

Repayment

Term loans are long-term financing options with repayment options that stretch over a long period. On the other hand, a working capital loan's repayment period/tenure is relatively flexible as it is a short-term financing option.

NBFCs and banks have designed several loan products for budding entrepreneurs to ensure they can fulfill short-term or long-term capital requirements. Therefore, based on the above factors, you can choose a loan suitable to your needs.

FAQs:

Q.1: Which is better? Term Loan or a Working Capital Loan?
Ans: Both loan products are ideal depending on the purpose or the period. Term loans are long-term financing products, while working capital loans are short-term financing products.

Q.2: What are the repayment modes available?
Ans: The loan repayment structure is flexible and offers multiple repayment modes, including standing instructions, NEFT Mandate, ECS, Net-banking, UPI, etc.

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