A term loan and a working capital loan are two of the most common types of loans available in India. They are both use to finance businesses, but they differ in terms of their purpose, structure, and payback period. This article will provide a brief overview of the eight key differences between a term loan and a working capital loan in India. It will explain the differences in terms of purpose, repayment period, interest rates, eligibility criteria, security, prepayment options, and availability.
Term Loan vs. Working Capital Loan in India
Obtaining capital for business is usually a challenging task for entrepreneurs, but having the right type of loan can make it easier. In India, two of the most popular types of business loans are term loans and working capital loans. It is important to understand the differences between the two in order to make the right choice for your business.
Purpose
The primary purpose of a term loan is to provide long-term financing for large capital investments, such as purchasing land or equipment. On the other hand, working capital loans are for short-term financing needs such as inventory, payroll, and other operational costs.
Interest Rates
The interest rates of term loans are typically fix while working capital loans have variable interest rates. This means that the interest rate of a working capital loan can fluctuate over the course of the loan term.
Collateral
Term loans often require collateral to be provided, such as real estate, equipment, or other assets. On the other hand, working capital loans typically do not require collateral.
Tenure
Term loans have a long tenure and are usually repaid over a period of 5 to 15 years. Working capital loans have a shorter tenure and usually need to be repaid within 1 to 3 years.
Amount
Term loans typically offer a larger amount of financing than working capital loans. A term loan can provide up to Rs. 30 crores, while a working capital loan typically offers up to Rs. 20 lacks.
Repayment
Term loans usually have a fixed repayment schedule, which means that the borrower must make a fixed amount of payment each month. Working capital loans typically have a flexible repayment schedule, which allows the borrower to make smaller payments when business is slow and larger payments when business is doing well.
Lenders
Term loans are typically provided by banks while working capital loans can be obtained from banks as well as non-banking financial companies (NBFCs).
Flexibility
Term loans are not very flexible and do not allow the borrower to make changes to the loan agreement once it is signed. Working capital loans, on the other hand, are more flexible and allow the borrower to make changes such as increasing or decreasing the loan amount, extending the tenure, or changing the interest rate.
Conclusion
In conclusion, it is important to understand the differences between term loans and working capital loans in order to make the right choice for your business. With the right loan, you can get the financing you need to help your business succeed. The key differences between a term loan and a working capital loan in India are the purpose of the loan, the terms of repayment, the interest rate, the amount of the loan, the security required, and the prepayment options. Depending on the purpose of the loan and the amount of funds needed, a business owner can decide which type of loan suits their needs best. Both loans offer advantages and disadvantages, and it is important to consider all factors before making a decision.
Working capital loans and term loans are two popular types of finance for businesses, each with a specific function. Making wise financial decisions requires an understanding of the main distinctions between various loan kinds. Here are eight distinctive characteristics:
Term loans are frequently utilize for long-term investments like buying equipment, building more space, or buying assets. Working capital loans, on the other hand, are intende to pay for short-term operating costs including payroll, inventory management, and regular business operations.
Structure of Repayment: Term loans are repay over a predetermine time period, frequently in equal monthly installments. Working capital loans, on the other hand, frequently offer more lenient repayment conditions that let businesses pay back the borrowed money as their cash flow permits.
Loan Amount: Because term loans are meant for significant investments, they typically offer bigger loan amounts. On the other hand, working capital loans typically offer smaller loan amounts to meet urgent financial needs.
Collateral Requirements: Term loans frequently need collateral, such as real estate, machinery, or other valuable assets, to secure the loan. Depending on the policies of the lender and the creditworthiness of the borrower, working capital loans may or may not demand collateral.
Term loans typically go through a more thorough approval process that includes thorough financial evaluations and documentation. Working capital loans could have an easier and quicker approval process because they are shorter-term and for lower amounts.