Difference between Term Loans and Capital Loans

Term loans and working capital loans are two of the most popular financial aids available to farmer enterprises in India. Financial crunches in business organisations that may hinder capital flow and handicap business development are dealt with effectively with the help of these financing options. The agricultural stratum in India can use these financial aids to boost production and sustainability. Hence, farmers need to choose suitable loan terms wisely based on their cash flow and liquidity needs.

Several organisations are faced with this choice multiple times during their lifetime. However, the need for financial support may come up rather frequently when you’re operating in the agriculture sector. Therefore, you need to set your financial sources straight and know your best option for getting the funds you need. You must understand and differentiate between term loans and working capital loans to make the right decision.

Term loans:

Term loans are secured loans that are usually used to fund capital expenses – including business expansion, acquisitions, new asset purchases or expensive machinery, and more. Also known as business term loans, these loans typically have a repayment tenure between one to ten years and they usually involve higher sums of money.

However, it is essential to note that this type of loan is available for diverse terms such as short-term, long-term, and medium-term.

A term loan is best suited for an established small business with sound financial statements. This type of loan limits other financial commitments the company may take on, including other debts, dividends, or principals’ salaries, and can require an amount of profit set aside for loan repayment.

While the principal of a term loan is not technically due until maturity, most term loans operate on a specified schedule requiring a specific payment size at certain intervals.

The key aspects of a term loan include:

• Higher loan amount
• Lower interest rates
• Complex paperwork requirements
• Mandatory collateral
• Multiple EMI options
• Longer repayment tenures
• Loan disbursement takes time.

Here’s the list of criteria that are checked:

• Bank statements
• Collateral
• Market reputation
• Ability to repay.
• Creditworthiness

Working Capital loans:

Working Capital loans are short-term loans mainly used to meet the costs of running a business – be it routine operational expenses or insufficient working capital. Working capital is an important funding source for farmers. It is the immediate cash they receive for the daily expenditures that their business might encounter. Organisations can take a working capital loan to pay staff salaries, monthly rent, and other day-to-day expenses or to meet some seasonal demands that might have shown up at the last minute. The assistance they get from these external funding sources helps them get back on track and continue with their work.

It is important to note that one cannot use the working capital loan for new investment or to start a new project or expand the business that they already have. These are liquid loans with a short term. This type of loan has a repayment tenure between three months to fourteen months if there is a timely repayment.

Key aspects of a working capital loan include:

• Smaller loan amount
• Higher interest rates
• Simple loan process
• Collateral may or may not be mandatory
• Limited EMIs
• Shorter repayment tenures
• Quick loan disbursement

Which finance option to choose?

Both types of loans are remunerative and essential to keep the business operations optimal. While selecting, the choice of finance will depend primarily on the nature of the capital need. Term loans are usually better choices for investment in heavy ventures. But if the company only requires small amounts to meet the operational expense, working capital loans are ideal.

For working capital improvement, capital loans are relatively easier to get, especially with a good credit score.

In term loans, the interest rates keep growing with the years, so in the end, you pay more in interest for the term loans when compared to working capital loans. Because of the longevity of repayment, it requires a lot of paperwork and many complex procedures.

You can use a loan calculator to estimate the requirements for working capital. It will help you analyse the inventory that has been built up, all the cash that you already owe, and consider the amount that you are supposed to pay to the suppliers. This also helps in more manageable repayment of the loan that is taken. For term loans, you can use a business loan calculator, which helps estimate the total of the repayment, along with the interest and the principal.

Thus, to sum up, working capital loans can meet your immediate financial demands and help you in paying off smaller amounts. On the other hand, term loans come in handy when you think of expanding or modifying your business or starting a new project altogether.