The need for finance arises during the course of a business. Firms have many alternative channels to choose from various sources of funds. But the bottom line decision is to choose between short-term working capital loans and long-term loans, as both of these sources work differently. Deciding on which source to apply,Term Loans VS Working Capital Loans, for given the circumstances is a tricky one.

Working Capital Loan

Working capital loans are an important source of funding for businesses to generate immediate cash for their daily expenditures. Sometimes, firms are cash-strapped and may require help to cope up with seasonal business demands or to pay salaries to their employees or even the monthly rent. Assistance from such external sources may help to get the business on track.

However, working capital cannot be used for investments in a new project or business expansion activities, as they are short-term liquid loans. Such loans are given only for a period of less than a year. It is comparatively easier to get working capital loans, especially if you have a good credit score. It does not involve much paperwork, as it is provided for a shorter term. The interest rates for working capital loans are high.

Estimating working capital requirement is easier if you use a small business loan calculator. It helps analyze the amount of built up inventory plus the cash you owe from others, minus the amount you have to pay to your suppliers. In a nutshell, it is the difference between your current assets and your current liabilities.

Term Loans

Term loans are usually taken for a longer term; say one to 10 years. Such sort of finance is used to fund major investments, the purchase of machinery or expanding business reach. Such loans involves a huge amount of money, the payment of which is done in a period of years.

Usually, it is considered that working capital is expensive. However, you end up paying more interest on term loans because the interest of the loan keeps building up over the years. You can use the business loan calculator to estimate the total repayment amount with the principal and the interest.

Getting a term loan is not a cakewalk; it involves a number of procedures and paperwork. Financial institutions check the borrowing company’s credit worthiness, bank statements, reputation in the market, collateral and the ability to repay before investing in them.

Understanding the nature of funds and tailoring them as per business needs is crucial for the success of your business. The type of funding largely depends on your business requirements. If you need financing to meet immediate business demands or to pay off a small amount, then a working capital is the best-suited option. On the other hand, if you are considering expansion, modification of business or introduction of a new project, long-term loans are a good choice.