How To Tell The Difference Between A Term Loan And A Working Capital Loan?
Working capital finance is a short-term loan—typically running up to three years—and is taken to meet routine business expenses as well as to cover business operation costs on a day-to-day basis. A working capital loan is not used to make large expenses on machinery or to expand production capacity or service.
A term loan, on the other hand, is a loan or borrowing where predetermined timely payments need to be made over a period of time. A term loan can be usually repaid within 1 to 30 years. It is used to finance new assets, to maintain machinery or to cover other capital expenses for which the business does not possess sufficient funds. There are two types of term loans: a fixed rate term loan where the interest on the loan does not vary over time and, a floating rate term loan where the interest varies depending on some predetermined criteria, which is decided at the time of offering the loan by the lender.
Also Read : Features And Advantages Of Working Capital Loans
Term Loans—An in-depth look
Term loans taken by businesses are usually for a long term as that translates into smaller EMI payments each month, making it less stressful on the business finances. Further, in case the business profit dips, smaller EMI payments are easier to manage. When taking a term loan for capital expense, it is wise to limit the term of the loan to the life of the machinery being purchased. This way when you need to replace the machinery, you will have cleared the loan and will be able to apply for a new loan if required.
Working Capital Loan—An in-depth look
Ideally the business plan of a company should ensure that there are enough funds to meet the working capital needs for at least six months until the income from sale proceeds is able to cover the day-to-day requirements. However, when the receivables are stretched and take longer to realise, a cash crunch to meet daily expenses and interest arises. Working Capital Loan can help your business stay on track with payments and maintain good credit.
Working capital loans are provided by lenders who offer varying working capital loan terms and interest rates. When applying for such a loan, it is necessary to shop wisely in order to get the best deal. You also need to study your business’ requirements of working capital and secure a loan only for the funds needed. After all, receipts from your business will be used to repay the working capital loan as well as the interest.
While shopping for a working capital loan, look for a well established lender who offers flexible repayment options, provides an easy application process and offers competitive interest rates. Have a look at Bajaj Finserv, as they offer working capital loans up to Rs.30 lakh with affordable fees and charges.