Term Loan vs. Working Capital Loan: What’s the Difference?
Term Loan vs. Working Capital Loan: What’s the Difference?
Both term loans and working capital loans are common ways businesses finance their needs, but they serve very different purposes. Here's a clear breakdown:
✅ 1. Purpose
Term Loan
Used for: Long-term investments like equipment, real estate, expansion, or major projects.
Goal: Help grow the business or make large capital expenditures.
Working Capital Loan
Used for: Day-to-day operational expenses—paying rent, salaries, utilities, inventory, etc.
Goal: Cover short-term cash flow gaps.
✅ Loan Duration
Term Loan
Length: Medium to long term (1 to 10+ years).
Repayment: Fixed schedule (monthly or quarterly).
Working Capital Loan
Length: Short term (usually 3 to 24 months).
Repayment: More frequent (daily, weekly, or monthly).
✅ Loan Amount
Term Loan
Amounts: Typically larger (can be hundreds of thousands or more).
Suited for: High-value purchases.
Working Capital Loan
Amounts: Smaller, just enough to cover short-term expenses.
Suited for: Managing temporary cash shortages.
✅ Collateral Requirements
Term Loan
May require: Collateral like property, equipment, or business assets.
Working Capital Loan
May be: Unsecured (but comes with higher interest), or secured with inventory/accounts receivable.
✅ Interest Rates
Term Loan
Typically lower, especially if secured or obtained from a traditional lender.
Working Capital Loan
Higher interest rates due to short term and higher risk for the lender.
✅ Approval Process
Term Loan
More paperwork and stricter credit requirements.
Slower to fund (often 1–4 weeks).
Working Capital Loan
Faster approval, especially from online lenders.
Funds can be available within days.
🔍 Summary Table
Feature Term Loan Working Capital Loan
Purpose Long-term investments Short-term operating needs
Loan Duration 1–10+ years 3–24 months
Loan Amount Larger Smaller
Interest Rate Lower Higher
Collateral Often required May or may not be required
Speed of Funding Slower Faster
Ideal Fo