Term loan vs business loan: Know the difference


Cost is an important aspect of any business but there are times when a financial crunch can disrupt the capital flow and slow the development of the business. When there is a capital shortfall, business owners can meet the cash crunch with the right finance option. There are term loans and business loans that are highly popular for business owners in India. They serve the same purpose for a business but they come with varying terms and conditions. To secure the right finance option, you must choose the right loan option based on the cash flow, business needs, and liquidity needs. Here are the main differences between a term loan and a business loan.

Term loan

A term loan is a type of business loan and it has a repayment tenure between one year to ten years. It is the first choice of most entrepreneurs in the country. The loan is usually taken to fund capital expenditure and for expansion purposes. It includes activities like a new asset purchase, business expansion, expensive machinery purchase, acquisitions, and more. It is usually a secured loan and is available for the short-term, long-term, and medium-term. There are a few distinctive features of the loan that include:

  • A longer repayment tenure,
  • High loan amount,
  • Low-interest rate,
  • Multiple EMIs,
  • A mandatory collateral requirement,
  • Takes time in loan disbursal,
  • Tedious paperwork.

Business loan

A business loan is a secured or unsecured form of financing that is offered to businesses. They help meet the immediate needs of the business and a lot of lenders offer term loans as a business loan variant. However, it helps to choose the loan product based on your business needs and repayment capacity. If you are looking for funds to meet the working capital requirements, you should apply for a working capital loan. If you want funds for the purchase of machinery, you need to apply for a machinery loan. Also known as commercial loans, it is available for sole proprietors, private companies, partnership firms, and self-employed professionals. Features of the loan include:

  • A secured or unsecured loan,
  • High-interest rate,
  • Takes time in disbursal,
  • Longer tenure,
  • Serves multiple purposes
  • No restrictions on the end-use.

Which loan option is ideal for you?

To make the right borrowing decision, it is important to consider the needs of the business, the purpose of borrowing, and repayment capacity. Additionally, you need to consider whether you want to provide security against the loan. If you do not have any assets, you will have to opt for an unsecured loan. The interest rate on a loan varies from one lender to another and you must compare the same before proceeding. You must identify the purpose of borrowing and then proceed with the application. For a small business, a term loan is an ideal choice but you need to own assets that can be used as collateral for borrowing. Do your homework and choose the right lender to fulfill the need for funds.