5 Differences Between Term Loan and Working Capital Loan

Regardless of size, all organisations rely on various financing sources in order to prosper and expand. Businesses use this cash to fund daily expenses like paying the rent, inventory, employee salaries, and growth. It is important to establish cash sources and determine the best course of action for obtaining the necessary funds. .

This article explores term loans vs working capital loans and helps you understand which of the two suit your business interests better.

Term Loans vs Working Capital Loans

Long-term loans, also known as term loans, are used when you need money for larger investments, business expansion, or the purchase of new equipment or tools. Due to their longer payback terms, they often have lower interest rates and are only acquired to satisfy specific demands.

On the other hand, working capital loans are acquired to meet the immediate cash needs of a business to fund its daily operations. These loans are typically obtained during times of financial stress for the company, and are disbursed for shorter periods of time.

Must Read: Different types of Working Capital

Key Differences Between Term Loans and Capital Loans 

1. Loan Amount

Term loans typically have larger loan amounts than working capital loans. This is so that the long-term requirements of the firm, such as business expansion or the acquisition of new machinery or equipment, etc., may be met. However, working capital loans are given out to meet a company's immediate, possibly temporary needs, they have a smaller loan amount (up to INR 75 Lakhs*).

2. Purpose of Loan

A term loan is typically the best option for purposes like business expansion plans, buying or replenishing inventory, the acquisition of equipment or machinery, or office space remodelling. On the other hand, a working capital loan is typically used to cover short-term working capital demands, such as salaries and everyday business operations.

3. Loan Tenure and Repayment 

The loan tenure on term loans is usually greater than that on working capital loans, as they have bigger loan amounts. Working capital loans, however, have shorter repayment periods (up to 48 months) due to their smaller sums.

4. Ease of Obtaining 

Working capital loans are simple to get when a company has a solid credit rating. There is also not much paperwork because the loan is only used for temporary purposes. In contrast, a term loan involves a lot of formalities and documentation. Before granting or denying borrowers' loan requests, lenders must carefully review the borrowers' creditworthiness, financial statements, ability to repay, and other variables.

5. Collateral/Guarantee 

Depending on the borrower's creditworthiness and financial situation, the working capital loan may or may not demand collateral. In contrast, term loans are secured loans with extended repayment terms that typically require assets as security.

Must Read: Working Capital Meaning

Documents Required For a Business Loan 

At SMFG India Credit, following are the business loan documents required to obtain a collateral-free loan:

1. Recent Photograph
2. Valid identity proof such as PAN card, Driving licence, etc.
3. Valid address proof such as Electricity bill, Passport, etc.
4. Financial account statements
5. GST or ITR
6. Income proofs
7. Proof of business existence (certificate of incorporation, etc.)

Conclusion

Despite being of distinct forms, both loans offer enticing benefits and conditions that are necessary for a successful business operation. A term loan is the best choice for projects requiring significant upfront investment. Nevertheless, if the business only requires a small sum to pay its operating costs, working capital loans are a fantastic choice.

To meet your business's demands, SMFG India Credit provides a wide range of collateral-free business loan options of up to INR 75 Lakhs* at competitive interest rates*. SMFG India Credit offers loans at affordable interest rates and flexible payback durations of up to 48 months. To apply for a business loan online, visit SMFG India Credit's apply now page to start the application process.