Term Loan vs Working Capital explained

A business term loan, also know as a working capital loan,   is a traditional funding option that provides a lump sum of money upfront, which is repaid over a set period with regular daily, weekly, or monthly payments. This type of loan is ideal for established businesses looking to finance short or long-term projects with significant expenses.

Key Features:

1. Loan Amount: Typically ranges from $5,000 to several million dollars, depending on the lender and the borrower's qualifications.
2. Repayment Terms: Fixed repayment schedule ranging from 1 month to 25 years, depending on the loan type and purpose.
3. Interest Rates: Can be fixed or variable, often determined by creditworthiness, business financials, and market conditions.
4. Secured or Unsecured: Loans can be backed by collateral (secured) or based on the business's creditworthiness (unsecured).

Common Uses:

• Purchasing equipment or inventory.
• Expanding business operations or opening new locations.
• Refinancing existing debt.
• Undertaking large capital projects.

Advantages:

1. Predictable Payments: Fixed repayment schedule makes it easier to plan for expenses.
2. Larger Loan Amounts: Suitable for significant investments or expansions.
3. Builds Credit: Timely repayments help improve the business’s credit score.

Disadvantages:

1. Strict Qualifications: Often requires good credit, consistent revenue, and business stability for longer terms.
2. Collateral Requirements: Some loans require business or personal assets as security.
3. Potential Prepayment Penalties: Some lenders charge fees for early repayment.

Example:

• A restaurant owner takes out a $100,000 term loan to renovate and expand their dining area. The loan is repaid over 5 years with a 7% fixed annual interest rate.

Would you like assistance in finding a term loan tailored to your business's needs?