When running a business, you may need funding at different stages—for daily operations or for long-term growth. Choosing the right loan type is critical, and two common options are Working Capital Loans and Term Loans.
In this blog, we’ll explain the key differences between working capital and term loans, their benefits, and how to choose the best one for your business needs.
A working capital loan is used to fund your business’s everyday operations, such as:
Purchasing raw materials
Paying staff salaries
Managing cash flow gaps
Covering short-term expenses
These loans are usually short-term, and repayment periods range from 3 months to 2 years.
A term loan is taken for long-term investments in your business, such as:
Buying new machinery or equipment
Expanding to a new location
Renovating infrastructure
Investing in technology
These loans can be short-term (under 1 year), medium-term (1–5 years), or long-term (5+ years) depending on the amount and purpose.
| Feature | Working Capital Loan | Term Loan |
|---|---|---|
| Purpose | Day-to-day expenses | Business expansion or capital investment |
| Loan Tenure | Short (3–24 months) | Medium to long term (1–10 years) |
| Loan Amount | Generally smaller | Usually higher |
| Repayment | Often via flexible EMIs or bullet payments | Monthly EMIs |
| Collateral | Often unsecured | Can be secured or unsecured |
| Processing Time | Quick approval | May take longer due to documentation |
| Interest Rate | Slightly higher due to short tenure | Lower, especially for secured loans |
If you need quick cash to cover operational gaps
Seasonal businesses that need to buy inventory in advance
To ensure smooth daily operations without cash crunch
Planning a long-term investment in your business
Starting a new product line or branch
Buying assets that will generate income over time
Yes. Many businesses take both types of loans depending on their cash flow needs and expansion plans. Just make sure:
You maintain a healthy debt-to-income ratio
Your business can handle the combined EMI obligations
Your credit profile remains strong
Both working capital and term loans serve different, equally important purposes. The right choice depends on your current needs, financial capacity, and growth plans.
Avoid taking long-term loans for short-term needs and vice versa—that can lead to repayment issues or cash flow mismatches.
