Term loan is a loan that is repaid in regular intervals over a pre-agreed period of time.

The time period of a term loan can last between one to ten years; however certain term
loans may last as long as 30 years. Term loans are divided into two main categories.
Fixed Rate Term Loan
A fixed interest rate loan is a loan where the interest rate does not vary during the term
of the loan.
Floating Rate Term Loan
In a floating interest rate loan, interest rate fluctuates during the term of the loan.
Term loans are a popular financing strategy predominantly utilized by small businesses,
where they usually apply for long term loans. This is because the monthly installments
will be smaller, which is convenient to be paid even if the business is not making
significant profits. On the other hand, businesses should also be mindful of overly
lengthy terms in case of floating rate loans due to the possibility that interest rates may
fluctuate significantly.
What is Working Capital Loan?
A working capital loan is a short term loan with the aim of financing the day to day
business operations of a company. Working capital loans are not used to inject capital
into the business or to purchase long-term assets or investments. Instead, it is used for
aspects such as to settle accounts payables, pay monthly interest or with regard to any
aspect that is involved with current assets and current liabilities.
Ideally, a company should always have sufficient cash to operate routine business
operations. This can be achieved through effective working capital management.
However, in practice, certain companies may struggle with the cash situation. This is
predominantly based on the industry where the sales are seasonal in nature. Another
situation that companies will require increased working capital is if it is pursuing an
aggressive growth strategy. In such cases, the sales are growing at a rate that cannot
be financed effectively; which is referred to as ‘overtrading’.
The requirement for a working capital loan depends on the nature of the prevailing
working capital position. It can be calculated as per below.
Working Capital Requirement = Inventory+ Accounts Receivables – Accounts payable
The most common method of obtaining a working capital loan is through a bank
overdraft. This is a facility granted by banks for its creditworthy customers, allowing
them to withdraw funds up to a limit that exceeds their bank balance.

What is the difference between Term Loan and Working Capital Loan?

Term loan is a form of borrowing where the payments can be made over a
predetermined period of time in regular intervals. Working capital loan is a loan taken
out to finance routine business operations to minimize shortfalls in working capital.
Time Range Term loans may be short, medium or long term.
Working capital loans are short term loans.
Installments Repayment of a term loan is done by many installments.
Repayment of a working capital loan is done by a limited number of installments.