Difference Between Term Loan and Working Capital Loan?

Capital Loan

A new business not only demands a lot of efforts, patience, and management skills, it also requires funds in the course of business development. Every step taken in business makes a difference. Your choice of funding your business can either make or break your business development. Therefore, it is essential to do thorough research before choosing your source of business funding. Generally, the most preferred funding source is Conventional loans. But, it is necessary to know the difference between the two major types of business loans viz. Term Loan and working capital loans.

All About Term Loans
A term loan is money borrowed from banks or Non-Banking Financial Companies (NBFCs) for a fixed tenor and for fixed or floating interest rates. These loans are asset-backed long term loans that are bought for capital expenditures like a business setup and business expansion. Usually, terms loans are repaid between tenors ranging from 1 year to 5 years. You have to pay higher interest rates in term loans if you have chosen floating interest rates. This is due to the increase in interest rates with the course of time.
Similarly, if you have chosen fixed interest rates, you will pay lower interests on term loans compared to working capital finance. Although, you can calculate the interest rates and principal amount to be repaid using the online business loan calculators provided on the website of your financial provider. The basic eligibility for applying for a term business loan depends on the company’s creditworthiness, market value, and the ability to repay the loan amount.

A Brief on Working Capital Loans
Many companies do not have a stable revenue throughout the year especially companies that manufacture and sell on a seasonal basis. The money borrowed from banks or NBFCs to cater to short-term goals like daily financial requirements of the company is known as working capital loans. Usually, the tenor for working capital repayment is as low as 4 months. This type of loans are helpful to payout the bills and settle other pending accounts of the company.
Companies prefer working capital loan to bridge the gaps in the business activities by paying the wages and other operational costs with the loan amount. Due to the shorter tenors, the interest rates applied to a working capital loan is comparatively higher. This loan is easily available, and some working capital loans are unsecured loans which mean no collateral is required for securing the loan. However, companies that have good creditworthiness and market value are eligible for working capital loans.

What is the Best Choice?
Choosing the right funding option and using it as per the company’s requirements is essential for establishing and developing any business successfully. This choice is solely dependent on the company requirement. If you need funding for short term goals, you can opt for a working capital fund, and if you need financing for long term business goals, you can choose a term loan. Reputed NBFCs like Bajaj Finserv offer unsecured business loans up to Rs. 30 lakhs at lower interest rates. These loans require submission of only 2 documents making the entire application procedure quick and hassle-free.
Moreover, the loans are pre-approved which means your loan amount will be processed and disbursed within 24 hours of the application. Another interesting facility provided by Bajaj Finserv is the Flexi Loan facility wherein you have a choice to repay only the interest as EMI and principal whenever you can afford to pay or at the end of the tenor. You can reduce your EMI payments by 45% with the Flexi Loan facility. Be it a term loan, or a working capital loan, you can easily apply and manage your loan account online with Bajaj Finserv.

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