What is the Difference Between Term Loan and Working Capital Loan?

The main differences between term loans and working capital loans are their purpose, repayment tenure, loan amount, interest rates, and collateral requirements. Here are the key differences:

1. Purpose: Term loans are typically used for long-term investments, such as purchasing assets or expanding operations, while working capital loans address short-term operational needs, including managing cash flow, inventory, and daily expenses.
2. Repayment Tenure: Working capital loans have a shorter repayment period, usually not exceeding 12 months, whereas term loans can have repayment periods ranging from 1 to 10 years, or even longer in some cases.
3. Loan Amount: Term loans involve larger amounts, which is why they have an extended repayment period. In contrast, working capital loans have smaller amounts, determined based on the business turnover.
4. Interest Rates: Working capital loans generally have higher interest rates due to their shorter repayment periods and higher risk. Term loans have relatively lower interest rates because they are long-term and usually secured by collateral.
5. Collateral: Term loans are often secured by collateral, such as assets or property, while working capital loans may or may not require collateral.

In summary, term loans are more suitable for long-term investments and business expansion, while working capital loans are designed to help businesses manage their short-term financial needs. The repayment tenure, loan amount, interest rates, and collateral requirements vary accordingly.

Comparative Table: Term Loan vs Working Capital Loan

Here is a table highlighting the differences between term loans and working capital loans:

Term loans are used for larger investments and have a longer repayment period, while working capital loans are used for financing day-to-day business operations and have a shorter repayment period. Term loans typically require collateral, whereas working capital loans may be secured or unsecured. The loan amount for term loans is generally higher than that of working capital loans.