Term Loans Vs Working Capital Loans: Which Is Best For Your Business?

Choosing the right type of financing can make a huge difference to the rate at which your business grows, as well as helping you to manage everyday operations. It can also help you to overcome the types of cash flow challenges that are commonly faced by small and medium enterprises (SMEs) in the UK.

Two of the most common finance options available are term loans and working capital loans. And while both provide essential funding, they are designed for very different purposes. Below we will explore in more detail the differences between the two, helping you to decide which is more suitable for your current financial needs.

What Is A Term Loan

A term loan is a lump sum of money that is borrowed from a lender and repaid in fixed instalments over a set period. This is usually one to five years but can also be longer. These types of loans are generally used for major investment projects, such as purchasing equipment or vehicles, renovating or expanding premises or funding long term business projects.

In general, they have lower interest rates and are usually secured with business assets or personal guarantees. That’s why they generally require a very healthy credit rating before approval is given.

What Is A Working Capital Loan?

A working capital loan is designed to help businesses take care of everyday expenses and shorter term financial demands. This can include things like payroll, rent, supplier invoices and other cash flow gaps. Loans are typically much shorter, generally between three and 18 months and are mostly unsecured. These loans also usually have a faster approval process with money being in your account in days rather than weeks.

Comparing Term Loans Vs Working Capital Loans

Term loans offer:

• Better suitability for long-term investments and growth
• Higher loan amounts
• Longer repayment terms
• Lower interest rates
• However, they also require:
• Longer approval times
• Collateral as security

Working capital loans offer:

• Better suitability for day-to-day operations
• Smaller loan amounts
• Fast approval times
• Unsecured approval

However, they also require

• Higher interest rates
• Shorter repayment terms

Which Is Best For You?

Now you have a clearer picture of working capital loans vs term loans​, it should be easier to determine which loan would be more suitable for your business. If you require access to fast capital to bridge the gaps in your cash flow, then a working capital loan is best. If, however, you are looking to expand and grow the business over time, then a term loan is much more suitable.

As always, look carefully at the terms and conditions of any loan as they can vary from lender to lender. You also need to assess whether you can comfortably make repayments of any loan you take out without placing undue financial strain on the business.

If you would like to know more about the difference between a term loan and a working capital loan​​, then get in touch with a member of the team here at Century Business Finance. We are always happy to help.

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