Term Loan vs Working Capital Loan: What’s the Difference?

If you are running a business, whether small or large, you will definitely need capital. Sometimes you need funds for long-term investments, and other times, you just need some help with daily business operations. This is where term loans and working capital loans come into the picture.

Although both are common types of business loans, they serve different purposes. Understanding the difference between a working capital loan and a term loan can help you choose the right option for your business needs. Let’s explore what each loan means, how they differ, and when to use them.

Understanding Term Loans: Your Long-Term Growth Partner

A term loan is a type of loan that you borrow for a fixed period, usually from 1 to 10 years or more. You receive the full loan amount at once and repay it in equal monthly instalments (EMIs) over the agreed period. Businesses usually take term loans when they need to make a big investment, such as:

• Buying machinery or equipment
• Constructing a new factory or office
• Expanding the business to a new location
• Purchasing vehicles or technology

Key Features of Term Loans:

• Fixed repayment period
• Used for capital expenditure or business expansion
• Higher loan amounts available
• Fixed or floating interest rates
• EMI-based repayment structure

Term loans are best for businesses with a clear growth plan and the ability to repay steadily over time. Since it’s meant for long-term use, the focus is more on future benefits than immediate returns.

Working Capital Loans: Managing Day-to-Day Business Needs

A working capital loan helps you handle your business’s everyday expenses. These are short-term loans used to cover things like:

• Paying salaries and bills
• Buying raw materials
• Managing seasonal dips in sales
• Handling short-term cash flow issues

This type of loan is usually offered for a shorter period, generally between 3 months to 1 year. The loan amount depends on your business turnover and current financial health.

Key Features of Working Capital Loans:

• Short-term funding solution
• Used for operational expenses
• Faster approval and disbursal
• Loan renewal or rollover is often possible
• Helps manage cash flow

If your business is going through a slow season or needs extra cash for daily operations, a working capital loan can help you stay afloat without disturbing your long-term investments.

Term Loan vs Working Capital Loan: What Sets Them Apart?

Now that you know what each type of loan is, let’s look at the difference between a term loan and a working capital loan more closely.

The main difference between working capital loan and term loan lies in purpose and repayment. A term loan supports future growth, while a working capital loan keeps your business running in the present.

Also, many people often confuse a working capital term loan with cash credit. While both are meant for short-term needs, there is a key difference between working capital term loan and cash credit:

• A working capital term loan is a fixed loan amount that must be repaid within a defined time.
• Cash credit is a flexible borrowing limit where you can withdraw as needed up to a certain limit and pay interest only on what you use.

So, if you want flexibility, cash credit is better. But if you want a fixed amount with fixed repayment, go for a working capital term loan.

Which One Should You Choose?

Both term loans and working capital loans have their place in business finance. The right choice depends on your current needs:

Choose a term loan if:

• You’re planning to invest in machinery, infrastructure, or technology
• You have long-term goals and need larger funds
• You’re confident about future income to repay over time

Choose a working capital loan if:

• You’re facing temporary cash flow issues
• You need funds for operational needs
• Your income is seasonal or uneven

You can even use both loans together. For example, use a term loan to expand your business and a working capital loan to manage daily operations smoothly.

Final Thoughts

In 2025, as more small and medium businesses grow across India, understanding the right type of loan is crucial. Whether it’s a term loan for long-term investment or a working capital loan to keep your business running, each loan plays a unique role in supporting business success.

Take the time to evaluate your current business needs, future goals, and repayment ability. Knowing the difference between term loan and working capital loan helps you borrow smartly and use your funds wisely.

Before applying, prepare your financial documents, check your credit score, and calculate how much you truly need. With the right planning, your chosen loan can turn your business vision into reality.