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Difference Between Business Term Loan And Working Capital Loan

When running your business the need for financial support may come up at some point. So, you need to set your financial sources straight and know what's the best option to get the necessary funding for your business. One option is a working capital loan and the other is a term loan. Moreover, there are a couple of differences between them, so here is all the important information you need before you make the final decision.

Business Term Loan V/S Working Capital Loan

  • Working Capital Loan

Working capital loans are primarily short term business loans. The need for working capital loans shows up to finances daily expenditures that the business encounters. Such as paying the monthly rent, or pay the salaries to the employees or cover some seasonal demands that occurred at the last minute. The assistance you get from these types of external funding sources helps them to get back on track and continue with your business operations smoothly.

One good feature of this loan is that it can be availed as many times a business might require since the only criteria affecting its sanction is the timely repayment of the loan. Also, keep in mind the working capital loan is not being utilized for new investment, or starting a new project or expanding the business that you already have. A working capital loan is a short term loan which means the period provided is usually a year or less.

Know more about the various types of working capital

  • Business Term Loan

Business term loans are primarily for the long-term and are availed to finance high-cost investments like an expansion of your business or for purchasing new machinery or tools. These loans usually involve higher sums of money compared to working capital loans, and this is the reason why they are paid off during a longer loan period. 

But, with the term loans, the rate of interest keeps increasing with the years, so in the end, you pay more interest for the term loans when compared to working capital loans. Being a long-term loan, it is not that easy to get it. Financial institutions run a check on the borrowers' profile and credit history before approving or denying the loan application. Given below is the list of things that the lenders take into consideration when approving a loan.

  • The applicant's bank statements

  • Market reputation of the business

  • Ability to repay the loan amount

  • Creditworthiness

  • Collateral

How can you use a Working Capital Loan?

  • Stock up inventory for your business

Most of the business owners take advantage of the additional boost of the income to stock on the inventory. With the funds acquired from working capital loan, you can purchase equipment such as computers, vehicles, and supplies for your business needs.

  • Paying Vendor

You can make use of the loan funds from working capital, to pay all of your vendors on time and run your business smoothly. You might have multiple vendors and if you ever fall short on finances you can use the loan amount to make payments.

  • Meeting unexpected resources

Mostly, in the case of a seasonal business, a business owner has to cover up the expenses. With a working capital loan, you will be able to cover all the expenses when your business is facing extreme consequences due to the slow season.

How can you use a Business term loan?

  • Increasing manpower

Funds from term loans can be used to hire and train new employees, with access to the funds the owners don’t have to worry about the payroll of the new employees. Moreover, with money on hand, the new employees would have ample amounts to experiment with the product and services and bring in new clients.

  • Investing in Property, Equipment, and Technology

Business Term loan is an ideal funding option for investing in mega projects and buying heavy machinery. From purchasing a new building to installing new advanced technology for your business, you have plenty of options. If you run a service business, then you can buy a new delivery truck so you save time and don't miss out on any of your customers. The idea being, you can use the funds from the term loan to purchase any sort of asset that can’t be converted into cash to be sold within the year.

  • Other Uses of a Business Term Loan

You can also make use of the extra funds to give a makeover to the website of your business, or bring in new ideas like hosting a promotional event for your business. Apart from this, you can use the funds from the loans to pay off any remaining debt. You are free to use the term loan to amplify your small business whichever way you see fit.

The success of your business depends a lot on the funds that you use and how you tailor those funds to suit your environment. So, it's best to keep all your business financial requirements in mind when choosing the type of loan that fits your plan.

By applying for business loans with Finserv MARKETS you can meet different needs of business ventures, such as machinery loan, unsecured working capital loan, capital loan, and term loan. Bajaj Finserv Business Loan is a collateral-free loan that helps businesses reach new heights. The loan application process is quite easy along with a quick disbursement process of the loan. The business loan amount gets credited directly in the borrower’s bank account within a few working days after approval. With flexible loan repayment tenure, the loan can be repaid easily through easy monthly installments.

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