Fixed Capital vs. Working Capital Loan: Which is Right for Your SME?

Running a business is a multifaceted task and involves a lot more than offering a product/service to the customers. It has several different factors, and arranging funds is undoubtedly among the most important ones. Every business needs money to run its operations smoothly and maintain cash flow. However, the amount a business needs may vary depending on its size, type of operations, etc.

While there are several different methods to arrange funds, obtaining a loan is often considered the best choice for small and medium enterprises. Nowadays, various banks and NBFCs are offering quick and hassle-free SME loans at highly competitive interest rates.

Table of Content

• What is a Fixed Capital Loan?
• What is a Working Capital Loan?
• Difference between Fixed Capital Loan and Working Capital Loan

Among the various financing options available, fixed capital loans and working capital loans are two prominent choices for SMEs. Each one of these two types of loans has its unique features, which make them suitable for different situations.

Here is a detailed explanation of fixed capital loans and working capital loans, their features, advantages and a lot more:

What is a Fixed Capital Loan?

A fixed capital loan, as the name suggests, is a financing option used to fund the purchase of fixed assets for a business. Fixed assets are those that are used to enhance the productivity and operational efficiency of a business and are used for an extended period. Some examples of these assets are machinery, buildings, land, equipment, etc. Generally, these loans come with longer tenure, ranging from 5 to 15 years.

What is a Working Capital Loan?

Working capital loans, on the other hand, are often availed to cover the short-term operational expenses of a business. These loans can help you arrange funds for day-to-day functioning, including finance inventory, payroll management, supplier payments, etc. Apart from this, working capital loans are also suitable for managing any cash flow gaps in your business. As compared to fixed capital loans, working capital loans have shorter tenure. It can range from a few months to a couple of years, depending on the lending institution.

Suggested Read: Working Capital vs. Term Loan - All You Need to Know from A Business Perspective

Difference between Fixed Capital Loan and Working Capital Loan

Now that you’ve understood the meaning of fixed capital loans and working capital loans, here is a comparison between these two options, on the basis of several factors:

Purpose

A fixed capital loan is mainly required for investing in fixed assets of a business. This can be anything like equipment, vehicles, land, buildings, etc. Apart from this, these loans can also be availed for executing a business expansion plan or renovation of the building where you run your business. Working capital loans, on the other hand, are usually obtained for smaller expenses that can create a temporary cash crunch. You can pay for the day-to-day operations of your business with this type of loan.

Amount

Fixed capital loans are primarily designed for funding major business purchases, and the loan amount is also higher. But working capital loans are mostly used to cover minor day-to-day expenses, and the loan amount is relatively smaller.

Loan Tenure

A fixed capital loan is a financing option used for long-term assets. Since the loan amount is big, the tenure of these loans is also longer. Working capital loans, on the other hand, are usually obtained to deal with the short-term needs of a business. As a result, the tenure of these loans is also smaller as compared to fixed capital loans.

Processing Time

There is not much difference between these two loan types when it comes to turnaround times. Any business that meets all the eligibility requirements kept in place by the lending institution can apply for these loans and get quick access to funds.

Rate of Interest

Generally, the loan tenure has a direct impact on the rate of interest applicable to a certain type of loan. So, working capital loans often come with a slightly higher rate of interest as compared to fixed capital loans.

Both fixed capital loans and working capital loans come with their own set of advantages and disadvantages. To make the right choice for your SME, you need to carefully assess your current financial situation, future goals, and funding needs. It is always recommended to choose the financing option that caters to the specific requirements of your business. At Muthoot Finance, we offer several different schemes for both fixed capital loans and working capital loans. You can explore all the options and make a choice. For more information, you can visit your nearest Muthoot Finance branch.