How do term loans differ from working capital loans?
- Posted: 20th June, 2025
- Updated: 25th June, 2025
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Term loans and working capital loans generally cater to the distinct financial needs of businesses.
The table below typically highlights the primary differences between these two types of loans:
| Parameter | Working Capital Loans | Term Loans |
|---|---|---|
| Purpose | Usually used to meet regular business operating expenses | Typically used for large business expansion needs and asset purchases |
| Tenure | Usually shorter duration up to 3-5 years | Relatively long-duration loans above 3-5 years |
| Loan Amount | Offer smaller loan amounts | Meant to offer higher loan amounts |
| Interest Rates | Interest rates are often slightly higher | Interest rates are typically lower |
| Eligibility Criteria | Eligibility criteria are less strict | Eligibility criteria are generally more stringent |
| Collateral | May require lower-value collateral | Often require high-value assets as collateral |
| Moratorium Period | Normally, have a shorter moratorium period | Tend to have a longer moratorium period |
| Flexibility | Repayment schedule changes may be possible | Loan conditions are typically less flexible |
| Risk Factor | Considered relatively higher risk | Usually, lower risk due to collateral |
The key difference is that working capital loans meet short-term needs while term loans enable large, long-term business growth investments. Requirements and parameters tend to differ with different lending institutions.
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