Difference between Term Loan and Working Capital

Published: 7 June 2025

Updated: 9 June 2025

Challenging phases are unannounced, and a shortage of funds for businesses has been noticed even with big names in industries. If you run a business, chances are that you have thought about getting a loan at some point. The reasons could be multiple—some growth plans, buying new equipment, paying salaries, or just help for managing everyday expenses. However, one often gets confused when they see a dozen loan options pop up. Confused about the different types of loans? Let’s simplify two of the most common types of loans useful for businesses— term loans and working capital loans. If you want to be clear with which one to pick, keep reading this blog and find out the difference between term loan and working capital term loan.

What is a Term Loan?

These loans are long-term loans that businesses take for a tenure of about 1 to 10 years. When a business is in need of money to acquire large assets, such as buying new machinery, expanding the business or making technology advancements, these loans are of great help. The repayment of these loans is made in regular instalments along with interest. These loans can also require collateral based on the lender's demands.

Additional Facts About Term Loans:

Term loans have a customisable loan structure.
Interest paid on term loans is usually tax-deductible as a business expense, offering financial relief.
Some term loans come with a moratorium or grace period during which only interest is paid and no principal repayment is needed.

What is a Working Capital Loan?

Next up, we have the business working capital loan. Unlike term loans, these are taken for a shorter tenure to pay salaries, buy inventory and clear regular bills. These loans are not meant for acquiring long-term assets or expanding the business. They are perfect during periods of low income when the business is facing seasonal slowdowns.

The repayment of these loans is easier and quicker. Thus, they are an ideal choice for small businesses. These financial tools help businesses stay stable during times of financial ups and downs when cash is temporarily unavailable.

Additional Facts about Working Capital Loans:

Interest on these loans is only charged on the used amount in certain types, like cash, credit or overdraft-based working capital loans
They help improve credit history and repay on time, gaining access to larger loans in the future
Custom repayment structures are sometimes available, including bullet payments or interest-only EMIs

Key Differences Between Term Loan and Working Capital Loan

In the following table, we have simplified for you the differences between term loans and working capital loans:

Term Loan	Working Capital Loan
A term loan is used for long-term financial needs.	A working capital loan is used for short-term cash flow needs.
It usually has a repayment tenure of up to 5 years or more.	It typically has a short and flexible repayment tenure.
The loan is often used for business expansion, machinery, or renovations.	It is mainly used to manage daily business operations and expenses.
The amount sanctioned is generally higher based on business size.	The amount is smaller and based on current business turnover.
Interest rates are usually lower due to longer repayment periods.	Interest rates are generally higher because of shorter tenure and quick disbursal.
It takes longer to process as the lender evaluates long-term risk.	It is easier to obtain, especially for businesses with good credit scores.
Repayments are structured in monthly EMIs over the agreed tenure.	Repayment can be more flexible, depending on cash flow.
It is a one-time disbursal meant for specific business purposes.	It is often structured as a revolving credit facility.
Collateral may be required depending on the amount and the lender.	It may or may not need collateral depending on business creditworthiness.
Ideal for funding assets or capital expenditures.	Ideal for managing operating expenses like payroll or inventory.

Which Loan is Right for Your Business?

Both term and working capital loans are essential tools for business finance. One isn’t better than the other, as they simply serve different needs. The right one depends on what stage your business is in and what you need the funds for.

Choose a term loan when:

You are ready to invest in future growth
You are okay with long-term EMIs
You are ready to buy your upgrade equipment

Choose a working capital loan when:

You need short-term financial support
Your cash flow is temporarily tight
You want funds for daily expenses

Conclusion

Now that you know the full picture of the term loan vs working capital loan debate, it’s easier to decide what fits your business best. If you are clear on your goals, My Mudra makes the rest easy. Whether it is handling daily expenses or funding big plans, there is a loan for you.

Head on to explore options on My Mudra now, check your eligibility, and apply for the loan that fits your business needs best.

Get the right loan at the right time. Your growth starts here!

Also Read:
- Get Working Capital Loans for Small Business
- How to Get Unsecured Working Capital Loan for Your Business

Frequently Asked Questions

Q1. Is a working capital loan a short-term loan? +

Ans: Yes, a working capital loan is a short-term loan used to fulfill short-term financial goals.

Q2. What are the eligibility criteria for a working capital loan? +

Ans: The eligibility criteria for a working capital loan are:

Business must be operational for at least 1 to 3 years
A CIBIL score of 650 or above.
Must meet the lender's minimum turnover requirement.
Valid KYC documents, bank statements, ITRs, etc.
Healthy and active business bank account.

Q3. What is the formula for a working capital loan? +

Ans: The formula for a working capital loan is:

Working capital term loan = total current assets - total current liabilities - bank overdraft - cash credit.

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Anjali Singh Assistant Manager

Hey there, I'm Anjali Singh. With over 6 years of experience in finance, I specialize in creating content on banking, loans, and financial planning. My goal is to simplify complex financial topics and help readers make informed decisions through my articles.