Over the span of running a business, business owners need extra funds to build the income. The extra funds from the loan can help cover a wide array of expenses. Both, working capital loans and term loans give enough margin to their users to manipulate the funds and use them to the full extent for the betterment of the small businesses. The most important question being: why do you need the funds? Is it integral to the survival of your small business? Or has an opportunity presented itself and you want to take advantage of it and grow your business? Let’s look at the major contradictions between a working capital loan and a term loan, so it easier for you to make a well-informed decision.
What is a Working Capital loan?
A working capital loan is offered to cover the short term financial needs of any small business and the loan amount offered to you is in accordance with the total cost of your running business. Basically, a working capital loan can’t help you in building an empire from scratch. For example, you have exercised your resources on another project and now you are left with no funds to pay the bills. Working Capital Loan gives you access to funds so that you are able to pay the bills the time on time. It is better if you are using a working capital loan to buy the inventory for your seasonal business such as if you are selling Halloween or Christmas decorations, then a little push from the extra funding can be helpful.
As the purpose behind this loan is to cover the mundane daily tasks, so it is unwise to use the working capital loan to invest in the bigger projects and resources. Although multiple funding is available to help small business owners around the globe, as a meticulous small business owner you should always design strategic business plans keeping your finances in mind. If you are applying for a working capital loan to solely pay your bills, what will happen when you run out of the resources? So, it is recommended to invest in a project that can act as a constant source of income, in the hour of need. Other than that uses the funds to eradicate the weakness and strengthen your business.
What is a Term Loan?
Basically, a term loan is used to cover the expenses of acquiring a capital asset. Capital asset means something or any valuables that have a useful life of more than a year and something that is not up for sales. So, at the end of the day, the term loan repayment is calculated based on the total earning and cost of the production.
Moreover, a term loan is the best funding option if you want to purchase a large-scale piece of equipment for your business or a property to expand your business. But before you sign the final papers for the working capital loan, you must evaluate the current financial position of your small business; is it stable enough to sustain the pressure of making repayments for a longer span of time? If yes, then you must apply for one.
Secured and Unsecured Funding option
A working capital loan is an unsecured funding option. So, if you need cash but don’t have any valuable assets to offer as collateral, then a working capital loan is your safest choice. On the other hand, if you are applying for a term loan, then you have to offer collateral, meaning something valuable to the lender. So, in case if a borrower fails to comply with the repayment schedule then, the lender has the right to seize the assets. So, make a wise pick as per the availability of the collateral.
- Payment terms and Schedule
A borrower is supposed to make the repayment within the time frame of four months. Mostly, the interest rate is higher than the average, as in certain cases the average amount can be as low as two-three thousand dollars. Once you have paid the dues on time, you can apply for a working capital loan again and again.
In addition to this, a term loan is paid over a span of more than five years. And the total repayment amount is calculated after adding all the additional revenue generated after using the capital assets acquired via a term loan.
- Improvement in credit score due to a Working Capital Loan and Term Loan
Making repayments and clearing of the debt on time can improve your position, financially. When comparing a term loan and a working capital loan, a term loan has a better chance of improving your credit score report. As the borrowed loan amount is higher so it is evident that the borrower has adequate cash flow and income to make the repayment on time. On the other hand, applying for a working capital loan again and again rather than getting approved for a large sum of money at once just like it happens in the case of a term loan can damage your credit score.
In case of paying the term advance within the given deadline, your potential lender will put in a good word with the credit bureaus and in the future, you would be approved for a higher loan amount. You can use a term loan in various ways to enhance the growth of your business.
How can you use a Term loan?
So, a term loan amount ranges from $20,000 to $500,000 and usually, a borrower has to make two payments once a week. The next questions that come to mind are how to use a term loan to run a small business more effectively? As a whole, term loans can be used for grand updates and improvements.
Funds from term loans can be used to hire and train new employees, with access to the funds the owners don’t have to worry about the payroll of the new employees. Moreover, with money on hand, the new employees would have ample amount to experiment with the product and services and bring in the new clients.
- Investing in Property, Plant, and Equipment
As you are getting plenty of dollars from a term loan, so this funding option is ideal for investing in mega projects and buying heavy machinery. From purchasing a new building to buying a new piece of equipment, you have plenty of options. If you run a service business, then you can buy a new delivery truck so none of your customers goes unattended. The idea being, you can use a term loan to purchase any sort of asset that can’t be converted into cash to can be sold within the year.
- Other Uses
You can use the extra funds to give a makeover to the website of your business, to engage with more customers. Apart from this, you can use the funds from the loans to pay off any remaining debt. Use the term loan to amplify your small business whichever way you see fit.
How can you use a Working Capital Loan?
There is nothing as stressful as not having adequate money to run the day to day operations and working capital loan provide whatever the business owner needs.
- Stock up on inventory
Most of the business owners take advantage of the additional boost of the income to stock on the inventory. With the funds, you can purchase equipment such as computers, vehicles, and whatever gadget your business needs.
- Paying Vendor
With the funds from working capital, you can pay all of your vendors on time and keep on running your business smoothly.
- Meeting unexpected resources
Mostly, in the case of a seasonal business, a business owner has to cover up the expenses. The working capital loan is the perfect remedy for the situation. So, you have the ability to cover all the expenses when your business is facing extreme consequences due to slow season.
Apart, from this, you can sue a loan to pay off short-term debt as well.
If your business can benefit from a working capital loan and a term loan, then head over to our website, and apply for the loan that compliments your business needs. For more information and difference between the two funding options, follow us on Facebook (@Onlinecheck) and Twitter (@Onlinecheck). If you have any question, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor will answer your every question and guide you throughout the way.