Working capital loans that come with a tenor of 2 weeks to a few months are best suited for short-term business needs.
On the other hand, you may need a loan of a medium to long tenor to meet business expansion needs. Term loans are best suited to cater to such business needs. These are loans with a tenor of 1-5 years that are designed to cover expensive investments that enhance revenue over the long term. For instance, term loan can be used to add a new unit or purchase new machinery or launch a new marketing campaign. Besides, term loans have several advantages that help you unlock growth. Here’s how:
Cheaper rate of interest
The rate of interest on term loans depends on a number of factors such as the nature of the project for which the loan is required, the repayment period and the structure of debt. However, since they are longer in tenor as compared to working capital loan, they attract an interest in the range of 9.50-11.50% as compared to a working capital loan interest rate of 12-16%.
Frees up cash flows
When you avail a term loan, you can effectively free up your cash flows for utilisation in other aspects of your business. For instance, when you avail of a term loan to purchase an asset, the cash flow freed up can be directed towards the hiring of more employees.
Flexibility and budgeting convenience
The best part about term loans is that they are flexible and can be altered to suit any business needs. You can negotiate the amount and tenor, depending upon the need of the hour for your business. You can also negotiate on the interest rate applicable with the lender before your loan application is accepted. In fact, the better your CIBIL score, the more you are in a position to negotiate terms and conditions of the loan. Once your loan is sanctioned, the regular repayment pattern can help you budget and plan your cash flow accordingly.
Having said this, a Flexi Loan offers greater ease of borrowing and convenience and many more benefits than term loans. To know the difference between Flexi Loans and term loans.
If you are in urgent need of funds, a term loan can come to your aid quickly. Usually, if you meet the eligibility criteria, the term loan for your business needs can be sanctioned within two working days, depending upon the lender you choose.
Establishes credit record
When you repay a term loan over a tenor of 5 years and make regular repayments according to the terms and conditions of the lender, you can establish a good business credit record over a period of time. This, in turn, will help you procure business financing easily at a later stage, as your enterprise grows.
Thus, while working capital financing is tailored to meet minor day to day expenses, a term loan is better suited for bigger business decisions that are aimed towards improving revenues over a period of time. When your business is ready to meet a new level of demand, a term loan can be considered as a stepping stone to success.