When it is about business, the requirement for finance is constant. Many medium and small-scale businesses often find themselves in need of ready funds either to expand or conduct their regular business operations. For them, again there are different options to select from, of which two most common types of loans are working capital loan and business term loan.
Table of Contents
What are working capital loans and business term loans?
Working capital loan and business term loan, both are credit instruments to cater to the financing requirements of enterprises. A working capital loan is an option availed by business owners to tide over short-term financial requirements or unexpected cash crunch. It can even assist them to keep up with their day-to-day business operations. A term loan, on the other hand, is the option where funds are made available for a specific duration, particularly anywhere between 1 year and 10 years. Like, working capital loan, business term loan too can be used to meet business requirements i.e., for hiring more employees, financing new equipment etc. However, these requirements are usually long-term in nature.
Distinction between working capital loan and business term loan
- Duration: Working capitalloan is generally availed to meet instant cash needs or short-term requirements. For long-term requirements or extended durations, businesses can avail term loans for a repayment tenure of up to 5 years.
- Loan purpose:For purposes like purchase of machinery/equipment or office premise renovation, business expansion plans, a term loan is a prudent option. On the contrary, working capital loan may be availed to tide over monetary mismatches and working capital requirements.
- Ease of availing loan:If you hold a strong credit score of 750 and above, availing working capital loan may be easier for you than term loan.
- Loan repayment:As working capital is a short duration credit option, it has flexible repayment tenure/period. Meanwhile, term loans generally come with a longer repayment tenure.
- Loan amount:Term loan includes a bigger amount; hence, it has a higher repayment period. However, in case of working capital loan, loan amounts are usually smaller as compared to the term loan limits, which are decided based on the business turnover.
- Rate of interest:While working capital loan is simpler to secure, it usually has a higher rate of interest owing to presence of shorter tenures while business term loans have comparatively lower rate of interest.
Cost control is important for a successful business operation. However, various occasional financial mismatches can massively disrupt capital flow and negatively affect business development. However, companies can easily meet their cash crunches with specialized financial options like working capital loans and business term loans. Both are highly popular financial aids available to the businesses in India. Businesses can secure a favorable financial option upon prudent analysis of their liquidity requirements and cash flow.