Finance

Working Capital Loan vs Term Loan – Which should you opt for?

For every business person out there, the important question is about raising the right amount of finance at the right time. It may happen that young Turks may not have that kind of money to invest. Of course, the cash part always seems inadequate. No matter how much resources they may have, they may need more to move ahead.

Additional financial support is always welcome to be in sync with the times and race ahead of the competition. It is essential to note that you have to get the options right. One of the best options available for you is a loan. As you may be aware, the loan market abounds with many possibilities. The choices may confuse you a lot.

About the borrowing trends 

It is vital to look ahead whenever there is a discussion on loans. The predictions help to understand the moods of a highly volatile market situation. With the current scenario, it is a conclusion that cash flow has taken a reverse turn. Liquidity is at the lowest ebb.

This situation of lending prospects in India is expected to be 6.50 percent in a years’ period. For the coming time, the bank borrowings are forecasted to hover at 6.20 percent in 2021, and 6.40 percent in 2022. These figures are available from prototypes.

About the loan options

When talking about loans, the first two terms that come in mind are working capital loans and term loans. Before you embark on a loan buying spree, you must know about all the facets. It may all sound effortless and a routine matter, it’s not. You have to have the right information about each type of loan.

Apart from the similarities (both being a loan in every form), you also have to know about the differences. In this article, the focus is on the nature of the working capital loan and term loan. Besides, the discussion will zoom around the differences between the two, and how it affects your growth prospects.

About working capital (WC) loans

When talking about working capital, note that they are a preference for current needs. In other words, the working capital provides you with immediate cash. This provision allows you to meet items of daily spending. You may be aware that companies are short of money sometimes. They are required to put up with extra efforts to cope. 

For example, this cash-strapping situation arises with seasonal business demands. Or it may be the case of paying salaries to employees or rounding off the monthly office rent. The support of an external financial source can help overrun such dire situations.

Working capital cannot be in use for investing. It is a part of short-term borrowing. You cannot utilize them for new projects or expansions. These credits are given for less than a year. It’s easy to procure WC loans. More so, if you have the support of a good CIBIL score. The paperwork is less, but the interest rates are on the higher side. You can use a small loan calculator to find the amount payable.

About terms loans (TL)

Terms loans are borrowings for extended periods. The tenure may run up to ten years. This type of finance is in use for significant investments. You may utilize it for procuring machinery and business expansions. This type of credit involves substantial figures, and the repayment comes about in many years.

You may pay more interest to Term loans than on WC Loans. You can refer to the business loan calculator to get the approximate amounts and the principal and the interest.

How to calculate equated monthly instalments EMI

You can work out the EMIs using a formula

E = P x r x (1+r) n / (1+r) n-1, substituting

E is EMI amount

P is principal amount

r is rate of interest of the borrowing

n is the loan period

For example,

P = 20, 00,000, r = 12%. N = 4 years, then

EMI = 20, 00,000 X 12%/12 X (1+12%/12) ˄ 4/ [(1+ 12%/12) 4-1]

EMI = Rs 52,668/-

When should you consider getting WC loans?

It would help if you go in for WC loans in the following situations

1 – You want to meet immediate monetary demands

2 – When you have to pay small amounts

When should you consider getting Term loans?

It would be best if you go in for WC loans in the following situations

1 – When you decide to expand your business

2 – When you think of modifications

3 – A new project

To conclude

You may need one or the other type of financial support. Think about the best beginning according to your requirements. Calculate the dues on a business loan calculator. It is the best device to let you know the amount you are liable to pay every month as repayment.

You need to provide documents in support. The list may include bank statements, your market standing, and your ability to pay. For further help and guidance, you may consult a firm that understands your needs and provides solutions for your business growth.

Joe Maillet

Joe Maillet is an avid reader and a writer by heart. He is an author, freelance writer and a contributor writer, who write articles and blogs for various leading online media publications and for CEO and entrepreneurs from across the world. He keeps himself updated with the latest marketing trends and always recognized in the industry for providing solutions to B2B and B2C businesses.

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