Difference Between Working Capital Loan and Term Loan

Working Capital Loan vs Term Loan

This is a question that many businesses will face in their lifetime, sometimes even more than just once. The need for financial support may come up a lot when you’re in the business world, so you need to set your financial sources straight and know what’s your best option for getting the funds you need. And, these term loans and working capital loans are the main factors that you need to think about when making your decision. There are a couple of differences between them, so here is all the important information you need before making the final decision.

Working Capital Loans

Working capital is a really important funding source for businesses. The working capital for them is the immediate cash they receive for the daily expenditures that the business encounters. Usually, the need for working capital shows up when businesses have to pay the monthly rent, or pay the salaries to the employees or cover some seasonal demands that have shown up in the last minute. The assistance they get from these types of external funding sources helps them to get back on track and continue with their work. A type of assistance that you can get for working capital is a working capital loan.

You need to know that you cannot use the working capital loan for new investment, to start a new project or expand the business that you already have. These are liquid loans with a short term. The period for which these loans are given is usually a year or less.

The positive side is that they are really easy to get, especially in situations where your credit score is at a good level. The paperwork is not huge since it’s a short-term loan. But, the interest rates are high.

You can use a loan calculator to estimate the requirements for working capital. The calculator will help you to analyse the inventory that has been built up, to add all of the cash that you already owe and also take in consideration the amount that you are supposed to pay to the suppliers. This helps in easier repayment of the loan that is taken.

Working capital loans, in comparison with terms loans, are relatively easier to get, especially with a good credit score. A working capital improvement is the main goal of such loans.

Term Loans

Term loans, as the name suggests, are loans that take more time, from one to ten years. These term loans are taken when you need funds for larger investments, for expansion of your business or for purchasing new machinery or tools. These loans usually involve higher sums of money than the working capital loan, and this is the reason why they are paid off during a longer period.

We mentioned that the interest rates for working capital loans are high, and this can lead people to think that it’s an expensive loan. But, with the term loans, the interest rates keep growing with the years, so in the end, you pay more in interest for the term loans when compared to working capital loans.

You have a business loan calculator which can help you in estimating the total of the repayment, along with the interest and the principal.

Because this is a long-term loan, it requires a lot of paperwork and many procedures. So, it’s not that easy to get it. Financial institutions need to check everything before approving or denying the loan request.

What’s checked?

  • Bank statements
  • Market reputation
  • Ability to repay
  • Creditworthiness
  • Collateral

The success of your business depends a lot on the funds that you use and how you tailor those funds to suit your environment. Deciding on which type of funding to get will mostly depend on what exactly your requirements will be.

When to get Working Capital loans

When to get Term Loans

  • Meet immediate financial demands
  • Pay off small amounts
  • Thinking about expansion
  • Business modification
  • Starting a new project

FAQs

1. What is a working capital loan?

Working capital loan is a loan that helps a company to fund the everyday operations. This capital covers short-term financial needs.

2. What is an example of a term loan?

A bank loan with varying interest rates, taken for starting new ventures, new projects or business expansion is a term loan. This loan needs to be paid in a certain amount of time.

3. How many business days after you submit your application will you receive a loan estimate form?

Usually, it takes up to 3 business days.