Businesses need external financing to succeed. No matter how large or small, every business relies on a variety of financing options to stay afloat and expand. It may be used to pay the rent or stock up on materials for an organization’s everyday operations. Alternatively, a firm may need a loan to fund its growth plans.
Leading NBFCs and financial institutions offer a range of financial products to meet working capital expenses at affordable term loan interest rates. People who run small and medium-sized businesses (SMEs) often have an immediate working capital requirement to run their operations or expand their businesses. Term loans and working capital loans are two major solutions for them.
To help you make an informed choice here is all the necessary information about the differences between a term loan and a working capital loan in India:
What is a working capital loan?
Working capital loans are funds that are used to pay for daily company expenditures such as rent, wages, raw materials, and other necessities in case you run out of funds. These loans are not intended to acquire long-term assets or make investments; rather, they are intended to meet your working capital requirement.
Because of the nature of the loan, the short-term loan interest rates are slightly on the higher side compared to other loans.
What is a term loan?
Term loans are large-value loans that are used to fund large-scale expenditures such as business expansion or the purchase of new machinery. Service-based businesses get the financial wherewithal to put money into technology improvements.
Term loan interest rates are low as it comes with longer repayment tenors.
Major differences between a term loan and a working capital loan in India
- Term loans are often used to fund company expansion plans, equipment purchases, and office renovations.
- As for working capital loans, you can avail of this financial solution when there is a cash shortage or a need for additional funds to manage working capital, for example, paying the rent, the salaries of the staff, etc.
- A term loan involves large amounts of funds since a company borrows money for this with the aim of expansion.
- The amount of loans taken under the working capital loan is often small since firms use them to bridge the gap between their operational cash flow and their debt service obligations.
- The repayment duration for working capital loans might be anything from a few months and might go up to 7 years
- On the other hand, term loans may be short, medium, or long. They have a tenor of one to 10 years in most cases, although some can last up to 30 years.
- Working capital loans have a higher interest rate since they are for a short period of time and are often unsecured.
- Term loan interest rates are lower than working capital loans, which makes them more attractive for business owners. However, since interest continues to accrue over time, the firm ends up paying larger interest amounts on term loans in the long run.
Now that you understand the differences between the two kinds of loans, you may choose the suitable loan that suits your funding requirement and repayment capacity. Leading financial institutions offer a range of products to help you meet your business needs. Bajaj Finserv is one of the leading NBFCs in India, offers unsecured business loans with simple eligibility criteria and minimal paperwork. This NBFC offers high-value loans with quick disbursal and a hassle-free process by providing personalized deals on a range of financial products.
Companies typically take term loans for a new project, expansion of an existing project, or expansion of their business. Business loans, personal loans, home loans, education loans, auto loans, and gold loans are among the many loan products lenders offer in India. Short-term loans are the best in India if they are available immediately. Because the loans need to be paid back quickly, they are called short-term loans. You must pay off most of the loan within six months to a year – at most, 18 months. Long-term loans are any loans that last longer than a year. Several term loans come in several varieties that are suitable for different types of applicants, besides these and several other benefits.