What is the difference between a working capital loan and a business term loan?
A working capital loan and a business Term Loan are two different types of loans that businesses can use to finance their operations and growth. They have different purposes, features, and benefits, and they should be chosen based on the needs and goals of the business.
Working capital loan
A working capital loan is an unsecured loan taken to fund a business’s daily or short-term operations. The loan amount is finalised based on the cost of running the business. Since it is used to address temporary cash flow problems, the tenure can be as short as four months.
Working capital loans are short-term business loans that can be availed and repaid many times as a business’ liquidity rises and falls. Businesses take working capital loans to purchase inventory, cover utilities, and wages, pay suppliers in advance, manage seasonal demands, etc.
Business Term Loan
A business Term Loan is taken for a pre-defined period and may be unsecured or secured. The repayment tenure can go up to 96 months, depending on whether the term is short, intermediate, or long. Businesses take Term Loans primarily for a long tenure and finance high-cost investments like business expansion or the purchase of expensive plants, machinery, and property. Here, the funding need is well-defined and time-bound, unlike a working capital loan, where liquidity shortfalls can be sporadic and temporary.
Working capital vs business Term Loan
There are multiple differences between a working capital loan and a business Term Loan.
- Purpose of the loan: A working capital loan is used for short-term operational needs, while a business-term loan is used for long-term investment needs.
- Duration of the loan: A working capital loan is repaid within a year or less, while a business Term Loan is repaid over several years.
- Interest rate: A working capital loan usually has a higher interest rate than a business Term Loan, because it is riskier and more expensive for the lender.
- Collateral requirements: A working capital loan may or may not require collateral, while a business Term Loan usually requires collateral.
The choice between a working capital loan and a business Term Loan depends on the needs and goals of the business. A working capital loan is suitable for businesses that have seasonal or cyclical fluctuations in their cash flow, or that face unexpected expenses or opportunities. A working capital loan can help a business to bridge the gap between its income and expenses, and to avoid cash flow problems. A business Term Loan is suitable for businesses that have stable and predictable cash flow, or that want to expand their capacity or market share. A business Term Loan can help a business to acquire new assets or improve its existing ones, and to increase its profitability and competitiveness.
Conclusion
A working capital loan is a short-term loan that is used to cover the day-to-day expenses of a business, while a business Term Loan is a long-term loan that is used to finance the capital expenditures of a business. A working capital loan usually has a higher interest rate, a shorter repayment period, and a lower or no collateral requirement, while a business Term Loan usually has a lower interest rate, a longer repayment period, and a higher collateral requirement.
