Choosing between a fixed term business loan and an ongoing working capital facility depends on whether your capital need is a one-time capital expenditure or a recurring operational requirement.
1. Business Term Loans
A business loan is typically a term facility disbursed as a lump sum amount and repaid over a fixed tenure (usually 12 to 60 months) through Equated Monthly Installments (EMIs).
- Purpose: Purchasing machinery, expanding premises, software acquisition, or funding medium-term strategic initiatives.
- Interest Calculation: Charged on the entire outstanding principal on an amortized basis.
- Structure: Structured repayment schedule with defined closure date.
2. Working Capital Facilities (CC/OD)
Working capital facilities are revolving limits that can be drawn, repaid, and redrawn continuously within the sanctioned limit and drawing power.
- Purpose: Purchasing raw materials, managing creditor settlements, meeting wage bills, and bridging receivables cycles.
- Interest Calculation: Computed purely on the daily utilized balance, not the total sanctioned line.
- Structure: Renewable annually upon review of financial performance and turnover.
How to Decide
If you need capital for machinery or fixed assets that generate cash flows over multiple years, a term loan is typically suitable. If funds are required to manage revolving operational requirements, a working capital facility offers higher interest efficiency.