Selecting the best finance solution is essential to the growth and sustainability of a company. Term Loans and Working Capital Loans are two common choices offered by lending organisations. Despite providing funding, they meet distinct business requirements. Identifying the one that best aligns with your objectives ensures more strategic growth and a more effortless cash flow.

What is a Working Capital Loan?

A Working Capital Loan is intended to cover a company's ongoing operating expenses. These consist of short-term inventory needs, rent, utility expenses, personnel wages, and raw supplies. This type of Working Capital Financing helps companies preserve liquidity and overcome short-term cash flow issues, especially during slow periods or while waiting for customer payments.

These Loans offer speedy access to money and flexibility without depleting long-term financial reserves. They are ideal for companies seeking short-term funding to maintain smooth operations.

What is a Term Loan?

A Term Loan, on the other hand, is ideal for long-term investments, such as infrastructure projects, equipment purchases, and business expansion. These Loans entail a one-time payment that is repaid over a predetermined length of time. Term Loans are perfect for planned capital expenditures because they are designed to promote strategic expansion or asset creation.

Key differences between Working Capital Loans and Term Loans

While both types of Loans may offer funding up to Rs. 75 lakh* and flexible repayment tenures of up to 60 months, the core difference lies in their purpose. A Working Capital Loan focuses on short-term liquidity, whereas a Term Loan supports long-term asset building. Working Capital Financing is more dynamic, addressing immediate business needs, whereas Term Loans are structured and better for major projects.

Both come with competitive interest rates starting at a specified rate and carry a processing fee on the Loan amount.

Eligibility criteria

To apply for either a Working Capital Loan or a Term Loan, the applicant must meet certain eligibility criteria:

• Must be an Indian citizen
• Minimum age of 22 at application and not more than 65 at loan maturity
• Business must have a vintage of at least 3 years
• Annual turnover of Rs. 10 lakh or more
• Post-tax profit of Rs. 2 lakh or more
• A credit score of 750 or higher

Required documents include proof of identity and address, audited financial statements, income tax returns, recent bank statements, and evidence of business continuity, such as trade licenses or registration certificates.

When to choose the right Loan?

A Working Capital Loan is the ideal option if your company needs funds to cover short-term cash shortages or manage operating expenses. It keeps operations running smoothly without using up long-term resources. However, a Term Loan may be more suitable if you are planning a significant expenditure, such as purchasing equipment or expanding your facilities.

Conclusion

Understanding the distinct roles of Working Capital Financing and Term Loans enables better financial planning. By selecting the right Loan product based on your business needs, you can maintain liquidity, support long-term growth, and strengthen financial discipline.