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.
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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