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Choosing the right financing: Term Loan vs Working Capital Loan
Understanding the difference between a Term Loan and a Working Capital Loan is crucial for businesses in order to manage their finances effectively. Both types of loans serve distinct purposes and offer different benefits. Knowing which type of loan aligns with your business needs can significantly impact your financial strategy and overall success.
Understanding Term Loans
A Term Loan has a fixed repayment schedule. These loans are primarily used for long-term investments, such as purchasing equipment, expanding business operations or acquiring real estate. The tenure of Term Loans typically ranges from 1 to 15 years.
A Term Loan usually has a fixed interest rate, providing predictable monthly payments structured in EMIs (Equated Monthly Instalments) over the agreed period. This type of loan often requires collateral, which can be risky if the business faces financial difficulties.
Exploring Working Capital Loans
Working Capital Loans are designed to finance the day-to-day operations of a business. These loans are used to cover short-term operational needs, like inventory purchases, payroll or utility bills.
The tenure of Working Capital Loans is generally shorter, ranging from a few days to few months. Interest rates can be variable, leading to fluctuating payment amounts, and repayment is often more flexible, with options to repay as per business cash flow. Many Working Capital Loans are unsecured, reducing risk for the borrower and providing necessary liquidity without long-term debt commitments.
Key differences between Term Loans and Working Capital Loans
- Purpose: Term Loans are ideal for long-term investments, while Working Capital Loans cover short-term operational needs.
- Tenure: Term Loans have longer repayment periods compared to the shorter terms of Working Capital Loans.
- Interest rates: Term Loans may have fixed or floating interest rates, whereas Working Capital Loans may have fixed rates.
- Repayment structure: Term Loans require regular EMIs, while Working Capital Loans offer more flexible repayment options.
- Collateral: Term Loans generally require collateral, whereas many Working Capital Loans do not.
Choosing between a Business Term Loan and Working Capital Loan depends on various factors, such as the purpose of the loan, the amount required and your repayment capacity.
If you need a substantial amount of capital for long-term projects, a Term Loan is ideal. But, if you need immediate funds to manage daily operations with a flexible repayment schedule, a Working Capital Loan is more suitable.
Ensure that your financial statements, credit score and business plan are in order to meet Business Loan eligibility criteria. Using tools like Axis Bank's Business Loan EMI Calculator can help you plan your repayments effectively.
Also Read: What are the different types of Business Loans?
Conclusion
Selecting the right type of financing is essential for both immediate needs and long-term business goals. Balancing the benefits of a Term Loan for substantial investments with the flexibility of a Working Capital Loan for daily operations can provide a robust financial strategy.
To seamlessly support your working capital needs, consider Axis Bank’s suite of corporate loan products. With features like quick disbursal, competitive interest rates and repayment options to meet your specific needs, Axis Bank can provide your business with the financial boost it deserves.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
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