The above table showcases the differences between both loan types in brief. Let’s now take a look at the detailed differences between a working capital loan and a term loan:
Term loans are used for larger investments such as starting new projects, purchasing real estate, financing new machinery or equipment, and so on.
On the other hand, working capital loans are used for financing day-to-day business operations in case of financial emergencies. These include paying rent, paying salaries to employees, buying raw materials, and so on.
Term loans have a longer tenure that usually ranges between 1-10 years.
On the other hand, the duration for working capital loans is shorter and ranges between a few days to a couple of months.
Getting a working capital loan is fairly easy and less time-consuming. Moreover, it doesn’t involve a lot of paperwork.
On the contrary, getting a term loan is comparatively time-consuming and involves a lot of paperwork and legal formalities.
A working capital loan has a shorter repayment period. Borrowers can pay it in full or in instalments whenever the lender asks.
On the other hand, term loans have a fixed but longer repayment period. Borrowers can repay the long-term loans in multiple instalments spread over a longer tenure.
Term loans essentially require collateral, such as any investment or property, to sanction the requested amount.
On the other side, working capital loans can be secured or unsecured. Simply put, they may or may not ask borrowers for collateral depending on the requested amount.
The loan amount in the case of term loans is higher as compared to working capital loans. The reason is very obvious: term loans are designed for significant projects and investments.
The interest rate is another major difference between term loans and working capital loans. Since term loans come with longer tenure, they carry comparatively lower interest rates than working capital loans.
Further, WCLs are used for immediate financing for the short term and hence carry a higher interest rate.
Although the creditworthiness of borrowers is checked in both types of loans, it is more emphasised for term loans.
In the case of working capital loans, lenders may be a bit lenient.