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Points of Differences Between Term Loan and Working Capital Loan

The Indian lending market has a variety of different types of credit schemes to offer. These include loans for personal use, education loans, and advances for organizations and businesses. These types of credit, commonly known as business loan, is one of the most common, and sought-after financing option available across the nation today. It caters to the expanding SME and MSME market and offers them a quick, affordable, and simple method to acquire financial backing. There are various types of business loans you can avail to boost your company’s finances. However, before availing such loans, you should carefully evaluate the different types of business loans available to identify which one will best suit your needs.

Types of Loans Based on the Requirement

Primarily, there are 2 different types of credits available, term loans, and loans to boost working capital. These loans aim to finance two main types of needs of companies – short term and long term.

Short Term Needs

Businesses require funds to keep their business up and running. Loans are acquired for the short run to ensure the smooth operations of a business. Short term business loans are also taken to purchase small machinery and maintain an adequate inventory for the company. Working capital loans are a prime example of such short term loans. The features of this loan are:

  • They are primarily unsecured loans, that is, they are given without any collateral guarantee.

  • These loans usually come with borrower-friendly features like flexible withdrawal and repayment policies.
  • To avail such a loan, you should fulfill specific criteria. High CIBIL score, proper profit and loss accounts and balance sheets of your company, appropriate income tax documents work in your favor while applying for working capital loans.

There are other things you should know about working capital, such as the various types of short term loans you can avail to finance your business.

  1. Accounts receivable loans: When a business gets an order for its product, it can approach financial institutions for a loan to finance the costs incurred to complete the order. The payment received after the completion and delivery of the product can be used to repay the debt.
  1. Trade credit: This type of loan is generally given based on the goodwill of a business in the market. If a company has a supplier who delivers raw materials in vast quantities and has a history of proper payment history, then the suppliers extend the date of the payment. It is a standard method used to finance the working capital requirements of a business. It is one of the most common types of working capital loan.

Long Term Loans

Long term needs of a company arise when it undertakes projects of expansion. Term loan can be availed to finance infrastructure development, opening a new branch in the same or different city, or buying expensive equipment to increase the total production volume. Technological advances made can also be funded by these loans. Term loans are debts of larger amounts. It has the following features –

  • You must have a high credit score while applying for such a loan

  • They have a longer tenor for repaying the loan which can last anywhere between 5 years and ten years.
  • These loans are usually disbursed against collateral.
  • Interest payable on these loans is comparatively lower as they are secured. They can be either fixed or floating.

Many financial institutions, such as Bajaj Finserv provide such loans. They also provide pre-approved offers that helps you save time by streamlining the application process.

Term loans are generally more popular among small businesses as they offer longer repayment tenor and larger sum for utilisation. It is easier for them to avail a term loan against collateral. However, working capital loans are more common among large businesses as they require vast amounts of capital to provide short term financial boost for generating more revenue. 

About author

Joel Borthwick is basically from Australia but is keen to explore everything under the sun. He is a part-time blogger, well acclaimed for his blogs on topics like - home improvement, business, lifestyle, health, travel and fashion. He aims to solve day-to-day problems of people through his blogs.
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