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Term Loan vs Working Capital Loan: Understanding the Key Differences

Unsecured business loans
18 December 2024
Katyaini Kotiyal
2,822

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What Is A Working Capital Loan?
What Is A Term Loan?
Key Difference Between Term Loan and Working Capital
Working Capital Loan vs Term Loan: Which is Best for Your Business?
Frequently Asked Questions

Managing a business in India’s evolving economy can be challenging, but handling the complexities with proper knowledge and understanding becomes easy. When financing your business, it's important to demystify the contrasting nature of term loan and working capital loan products. These two loan types play a crucial role in meeting your financial needs but serve different purposes under the Fair Practices Code prescribed by the RBI.

In this blog, we will break down the difference between term loan and working capital loan, simplifying the complexities and helping you make informed decisions. We explore term loan vs working capital loan structures, suited for long-term investments and short-term operational requirements respectively.

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What Is A Working Capital Loan?

A working capital loan is a type of financing designed to provide companies with the funds they need to pay for regular operating costs. As per the liquidity guidelines for regulated NBFCs, it helps ensure seamless cash flow, manage inventory, and fulfill immediate financial commitments.

Unlike long-term loans generally used for large investments, working capital loan vs term loan comparisons highlight that the former focuses on addressing immediate and short-term financial needs. These loans offer businesses the liquidity required to navigate seasonal fluctuations, often without requiring asset-based collateral for smaller tickets.

What Is A Term Loan?

A term loan is a type of a Business Loan provided for a fixed term, usually used for long-term investments such as equipment purchases or expansion. It offers a lump sum amount with a predetermined repayment schedule, providing stability for businesses' financial planning.

Term loan and working capital loan structures differ significantly here; working capital term loans may exist for bridge financing, but a standard Term Loan is your go-to for capital expenditure (CAPEX). Regulated NBFCs offer these with flexible tenures to support the 'Make in India' initiative.

Key Difference Between Term Loan and Working Capital

Exploring the difference between term loan and working capital options is essential for your business’s debt-to-equity ratio.

Below is a detailed comparison:

Parameter	Term Loan	Working Capital Loan
Duration	Long-term commitment: Typically ranges from 3 to 10 years, aligning with the economic life of the funded asset.	Short-term instrument: Usually spans 6 to 36 months to manage the immediate operating cycle.
Instalments	Fixed EMIs: Structured through Equated Monthly Installments, enabling predictable long-term financial planning.	Flexible or revolving structure: May include interest-only payments, bullet repayments, or revolving Credit / Overdraft limits.
Purpose	Asset creation (CAPEX): Used strictly for capital expenditure such as machinery, real estate, or long-term infrastructure.	Liquidity support (OPEX): Designed to bridge cash-flow gaps related to payroll, inventory, and day-to-day operations.
Interest Rate	Competitive pricing (approximately 9% – 16% p.a.), generally lower due to secured nature and long-term risk assessment.	Premium pricing (approximately 12% – 24% p.a.) owing to shorter tenure and often unsecured exposure.
Ease of Getting Loans	Documentation-intensive: Requires three years of audited financial statements, detailed project reports, and Techno-Economic Viability (TEV) studies.	Digital-first processing: Faster approvals (24–48 hours) using Account Aggregator (AA) data and GST-verified turnover.
Loan Amount	Higher quantum: Structured to fund significant investments, with limits based on asset valuation and long-term repayment capacity.	Targeted quantum: Smaller ticket sizes focused on short-term liquidity and operational requirements.
Collateral	Mandatory security: Typically requires the primary asset being financed and often additional immovable property.	Optional or hybrid security: Can be unsecured for amounts under ₹50 lakh or secured through hypothecation of inventory and book debts.
Credit Score Impact	Long-term credit health: Consistent EMI repayment positively strengthens CIBIL Rank and overall creditworthiness.	Usage sensitivity: Regular reporting helps build score, but high utilization (above ~70%) may signal liquidity stress to credit bureaus.

Working Capital Loan vs Term Loan: Which is Best for Your Business?

Choosing the right instrument is critical for maintaining a healthy Debt-Service Coverage Ratio (DSCR).

Choose a Term Loan if: You are expanding your footprint, upgrading technology, or purchasing fixed assets that will yield returns over several years.
Choose a Working Capital Loan if: You face seasonal demand spikes, need to manage "Accounts Receivable" delays, or require a quick liquidity cushion without pledging property.

Frequently Asked Questions

Can A Business Take A Term Loan And A Working Capital Loan Simultaneously?

Yes. In fact, most well-managed companies use a "Hybrid Credit Strategy." They use a Business Term Loan for fixed asset creation (like machinery) and maintain a Working Capital Loan (such as an Overdraft or Cash Credit limit) to handle day-to-day liquidity. This ensures long-term debt isn't wasted on short-term needs.

Which Loan Is More Tax-Efficient For A Registered MSME?

Both offer tax benefits, but in different ways. For a Term Loan, the interest component is a deductible business expense, and the asset purchased allows you to claim depreciation. For a Working Capital Loan, the interest paid is fully deductible as an operational expense.

Do I Need Collateral For A Working Capital Loan In 2026?

Not necessarily. Under the current CGTMSE scheme and updated 2026 NBFC digital lending models, many working capital loans up to ₹50 Lakhs and even up to ₹5 Crores for specific sectors are offered collateral-free. However, high-value term loans almost always require primary security.

How Does The "Account Aggregator" Framework Speed Up My Application?

As of 2026, regulated NBFCs use the Account Aggregator (AA) network to access your GST and bank statements digitally with your consent. This eliminates physical paperwork and allows for the instant disbursal of working capital loans, often within 24 to 48 hours, compared to the 1-2 weeks required for traditional term loans.

Are There Any Foreclosure Charges If I Repay My Loan Early?

Per the RBI’s January 2026 Guidelines, no pre-payment or foreclosure charges can be levied on floating-rate loans extended to Individual borrowers and MSEs (Micro and Small Enterprises) for loan amounts up to ₹50 Lakhs. For larger corporate term loans, charges may apply as per the board-approved policy of the NBFC.

Can A Startup With Only 1 Year Of Vintage Apply For These Loans?

Startups find it easier to secure a working capital loan or a "Startup Term Loan" under the Credit Guarantee Startup Scheme (CGSS) after 12 months of operations. Traditional business term loans usually require a 3-year audited track record to prove long-term viability.

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