Know the Difference Between Term Loan and Working Capital Loan

Duration

Term Loans have a longer repayment period, ranging from a few years to a decade. Whereas Working Capital Loans usually have a shorter duration, typically ranging from a few months to a few years.

Instalments

Term Loans can be repaid in fixed monthly instalments, including both principal and interest. On the other hand, the Working Capital Loan repayment structure varies, with some loans requiring periodic interest payments and the principal repaid at the end.

Purpose

Term Loans are ideal for long-term investments, such as purchasing assets or expanding operations. Working Capital Loans address short-term operational needs, including managing cash flow, inventory, and daily expenses.

Interest Rate

Term Loan generally has lower interest rates due to the longer-term and collateral requirements. If we talk about Working Capital Loan, the interest rates can be higher due to the loan's shorter-term nature and potentially unsecured nature.

Ease of Getting Loans

In some cases, Term Loans often require extensive documentation, financial analysis, and collateral, making the approval process more time-consuming. Working Capital Loans are easier to obtain, with fewer requirements and quicker approval processes, especially for unsecured loans.

Loan Amount

Term Loans offer larger loan amounts to finance significant investments and projects. Working Capital Loans provide smaller loan amounts to cover immediate operational needs and short-term requirements.

Collateral

Term Loans often require collateral, such as property, to secure the loan. Working Capital Loan can be secured or unsecured, with collateral requirements varying depending on the lender and loan amount.

Credit Score

Lenders may emphasise the borrower's credit history and credit score for Term Loans. While credit history may still be considered for Working Capital Loans, lenders may be more lenient and flexible with credit score requirements.

Conclusion

Understanding the difference between Term Loans and Working Capital Loans is essential. Term Loans are for specific purposes, while Working Capital Loans support day-to-day operations. MSMEs benefit significantly from these loans. Term Loans offer competitive interest rates and longer repayment periods, as companies utilise them for expansion and capital expenditures. Working Capital Loans help manage cash flow, inventory, and operational expenses. By using both effectively, MSMEs enhance financial stability, seize growth opportunities, and navigate challenges successfully.

FAQ

• Can term loans be used for working capital?

Yes, Term Loans can be used for working capital, but they are typically more suitable for long-term investments rather than short-term operational needs.

• What is a term loan to finance working capital?

A Term Loan is used to meet long-term financial requirements, such as capital expenditures or business expansion, rather than specifically for working capital purposes.

• What is the difference between a term loan and personal loan?

The key difference between a Term Loan and a Personal Loan is that businesses take a Term Loan for specific purposes. In contrast, individuals take Personal Loans for various personal needs.