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

Every business operation requires financial support in its lifetime. Funding is, after all, an important part of business development. As a business owner, you need to set your priorities straight in order to get the funds required for the business. Your central line of focus will revolve around term loans and working capital loans. These two are the most common types of financial support available for businesses in India. Depending upon your business cash flow and liquidity requirements, you can choose an appropriate loan term. Whether it's business expansion or meeting the everyday needs of the business, it all comes down to funding. You can make an informed decision by knowing all about these loans.

Let’s see what these loan terms are and the differences between them: -

What is Working Capital?

Working capital is the amount spent on daily business expenditure for the operational needs of the business. In other words, you can say that it is the difference between current assets and current liabilities. Working capital management is crucial in any business to ensure long-term sustainability. It has a huge impact on the liquidity and profit-making of the business.

Types of Working Capital

Permanent Working Capital

It is the least amount of current assets required for effortless business operations. It depends on the business's size and growth.

Variable working capital

Variable working capital is the working capital invested in the business for a temporary time period.

Gross Working Capital

The sum of the company’s assets is called the gross working capital.

Net Working Capital

The exact difference between the current assets and current liabilities is called net working capital.

What is a Working Capital Loan?

Running a business comes with numerous financial challenges on a day-to-day basis. Some seasons are more profitable than others. As a business owner, you may require short-term financing to manage your recurring business expenses. In such cases, the financial aid available to you is a working capital loan. Working capital finance is the immediate funding source available for businesses in India. Usually, a working capital loan is provided for daily business expenses like rent, monthly salary, utility bills, and seasonal demands. This is a short-term loan with a repayment tenure ranging between three and fourteen months. You can apply for the required loan amount based on your cash flow needs.

Some of the Key Features of a Working Capital Loan

• Easy loan application procedure

• Shorter repayment tenure

• Quick Loan Disbursal

• Limited period of EMIs

• Small loan amount

Many SMEs opt for a working capital loan to keep their business operational. They use this fund to manage their daily requirements. Many businesses are able to grow their businesses by using this financial aid at the right time to stay afloat.

What is a Business Term Loan?

Any business that goes through different phases of expansion. It is important to grow the business at the right time to capture sizeable market share. Business expansion or upgrading technology requires a large sum of investment. Every business owner must take the call to make the necessary investment in R & D, technology, and other business functions. At this point, a business term loan is the best option to take.

A Business term loan is a loan taken for a longer period of time. These term loans are taken by businesses for large investment purposes. When a business goes through a transition phase, these funds are used for upgrading technology, skills, and products. Usually, the loan amount is larger than the working capital loan. However, a longer repayment period distributes the amount in small EMIs to ease the financial burden of the business owner.

Key Features of a Term Loan

• The loan application process takes a little more time than working capital loans.

• Longer repayment tenure

• The loan amount is higher

• Need for collateral

• Multiple EMIs

How to choose between a working capital loan and a term loan?

Both the loans have attractive features. You should choose according to your business needs. If you are investing in a heavy business venture, then go for a term loan. If you want to fulfil short-term business needs, then go for a working capital loan.

Working Capital LoanBusiness Term Loan

Meet operational needs of the businessIn case of business expansion

For paying off small amountsNew project in the business

Get Business Loan from Muthoot Finance

Your business may need short-term and long-term financing. You can get a business loan from Muthoot Finance at attractive interest rates. Our loan features are designed to cater to all your business needs. As a preferred financial partner, we strive to bring the best products that support your small business requirements, including daily operational needs and long-term financing needs.

Some of the key features of our SME loan are:

• Flexible loan tenure

• No loan preclosure charges

• Relaxed eligibility criteria

• Minimal documentation

Muthoot Finance is constantly working to faciliatate financial aid to SMEs so that they can flourish in the future. It is a step towards building the business economy in India.