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October 14, 2019 / By Jared Cohen

Working Capital Loans vs. Term Loans

A working capital loan and a term loan are two different types of business funding options although both serve a similar function of meeting with the daily operational costs of a company. Working capital loans refer to short-term business funding options that are required to be repaid within a shorter period. Typically, they feature a small amount of money and are designed to cover the day-to-day expenses and regular costs of a company. Most of the time the loan amount is determined based on the cost of running the business.

Generally, a working capital loan involves repayment terms starting as short as three months and can go for as long as one year. In addition, the interest rate can be higher when compared to other common business funding options because of how small the loan amount is. That being said, so long as the loan is repaid on time a working capital loan can be used to fund business operational costs again and again as per the needs of the borrower.

A term loan, on the other hand, features longer repayment periods ranging from one year to five years. These types of loans are usually designed to cover daily expenses and regular costs, as well as help to cover bigger investments that would, in turn, help the company increase its revenue. The loan amount here is usually determined based on the projected sales and returns on investment, and it can go as high as $5 million depending upon other criteria set by the lender. In addition, the common prerequisites involved in term loans, such as repayment method, need for collateral, interest rate, etc., vary depending upon the lending party as well.

Both of these loan types are suited for smaller businesses and startups that are finding it difficult to manage their regular expenses. However, it is important that you only apply for a working capital loan or a term loan when you are confident that you can pay off the debt in time without having to run into any cash crunch situation. For instance, you should never secure business funding only to pay off your bills or manage the inventory. Instead, it should be used to cover the cost of running your business so that you can have a stable revenue to repay the loan amount in time.

In general repayment amounts are lower when it comes to term loans, meaning that it can be easily managed when compared to working capital loans. Besides, you can also use the loan amount for a wide range of purposes, such as buying new equipment, launching a new marketing campaign, or securing an additional property, and in turn, leading to more revenue for your business. So in a nutshell, while working capital loans are great for minor expenses, term loans can be better for major expenses that can help deliver long-term results for your business.

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