Businesses and loans have a lasting connection. Most businesses require loans for running their operations smoothly or for business expansion purposes etc., making loans an integral business aspect. A business must choose its loans appropriately for serving its purpose efficiently. 

Term loans and working capital loans are two of the most popular business loan choices available in India. One needs to understand the difference between these two loan options, before choosing the best loan alternative to meet their business requirements satisfactorily.

Let’s compare the features of term and working capital loans. 

Measure

Term Loan

Working Capital Loan

Loan Period

Short-term/medium-term/long-term

Short-term

Loan Amount

Higher value

Lower value

Rate of Interest

Low

High

Loan Tenure

Normally ranges between 1-10 years, but in some cases could be extended further

Normally ranges between three months to fourteen months

Loan Type

Secured loan with collateral

Mostly unsecured

Reason for Loan

High-value business plans like an expansion of business, acquisitions, purchase of heavy machinery, etc.

To meet immediate business requirements, like a shortfall in working capital, regular operational expenses, pay monthly rent etc. 

Disbursement of Loan

Longer time period

Easily disbursed

Paperwork/Procedures

Tedious and complex

Simple and easy

Term loans and working capital loans are both attractive loan options for businesses. However, the choice of loan would depend on the business requirement and the purpose for which capital is required.

Points to Note: 

Term loan is a better choice for heavy business investment plans, while working capital loan works well for short-term business needs.

Timely repayment of term loans improves credit scores while working capital loan repayment has not much impact on credit score rating.