Is A Working Capital Loan Better Than A Business Loan?
A business needs cash to finance its needs, whether it is an established business or a start-up. As a vendor, you can consider various financing options, including a working capital loan or business loan. The loan option you consider will depend on the business needs, which can be near-term or long-term. For example you should consider a working capital loan from providers such as KredX, in case your working capital requirement is to meet expenses like machinery repair or procuring raw materials.. However, if it is for a long-term asset, then a business loan might be an ideal option for you. Businesses look at their working capital ratio to determine the financing they need. Through invoice discounting, you can get a short-term business loan via the KredX Invest App.
What Is The Difference Between A Working Capital Loan And A Business Loan?
A working capital loan is a short-term business loan that a vendor can use to finance daily operations. This loan can cover operating, inventory, and payroll costs. Most importantly, a working capital business loan comes in handy when facing a financial crunch. Additionally, the loan will not be for a specific use, and the business can use it to meet various business expenses.
On the other hand, a business loan is a secured or unsecured term loan that a business will take for a given period. The business’ working capital policy may influence the working capital financing requirement considering assets which may be used as collateral and means of financing them are involved in capital management. The repayment period is fixed over a specific period from 1 to 10 years.
Another major difference between business and working capital loans is the amount you can borrow and the interest rate. For working capital loans such as invoice discounting through KredX, the loan amount is smaller and will be determined based on business turnover. Because of the short repayment period, the interest rate on a working capital loan is considerably higher. On the other hand, the business loan amount is usually more significant, which is why the repayment period is long, and interest rates are comparatively lower.
Why Choose A Working Capital Loan Over A Business Loan?
No Collateral Needed
Without collateral, businesses can access a working capital loan, such as invoice discounting, from the KredX . Invoice discounting in India involves getting a cash advance against your unpaid invoices. Unlike business loans, where the vendor may be required to provide collateral to access a loan, a working capital loan doesn’t need any form of security, thus making them ideal for vendors that don’t have assets to offer as collateral.
The interest rate and repayment terms for working capital loans are flexible. This makes working capital management for the vendor easier since they can pick the repayment schedule fitting their business needs and cash flow. With the working capital loan, the lender designs the repayment plan based on business profits and cash flow. Besides the flexibility offered by the provider, you could also use a working capital loan for different uses without restrictions, provided the money is used to keep the business operational. However, there is no such flexibility for a business loan because you will secure the loan for a predefined purpose.
Compared to long-term business loans, working capital loans’ interest rate amount will be lower. In addition, since they are short-term business loans, interest rates will be paid within a short period, unlike in a business loan where monthly interest will keep adding to business expenses for the tenure of the loan. Therefore, vendors can save on interest expenses and boost their bottom line with working capital loans.
Requirements Are Not Stringent
Interestingly, it is much easier to qualify for a working capital loan such as invoice discounting India relative to a business loan because the lender will look at the vendor’s ability to repay the loan and the cash flow instead of focusing on collateral or credit rating. Therefore, a working capital business loan is ideal for vendors without assets to provide as collateral or those with less-than-perfect credit.
Faster Processing And Disbursement
The process involved in the approval and disbursement of your working capital loan is easy and faster. For instance, with KredX, you can have your invoice discounting solution processed within 24 to 72 hours, and the process is done online without needing a lot of paperwork. In addition, a working capital solution has been designed to offer vendors immediate capital during the crisis to meet the operational cost. Ultimately, immediate capital can help the vendor deal with a financial crisis with ease.
The Advantages Of A Business Loan Over A Working Capital Loan
Long Repayment Period
Usually, business loans can be repaid within 1-10 years. The extended repayment period allows the vendor flexibility to manage cash flow before paying back the loan, unlike the working capital loan, which has to be repaid quickly.
Access Larger Loan Amount
The other advantage of business loans over working capital loans is the amount of credit the vendor can access is quite considerable. Working capital loans are small cash advances that enable the business to meet its daily needs, but a business loan can be huge, allowing the vendor to invest in business expansion.
Option To Leverage Collateral
Usually, working capital loans‘ primary focus is business cash flow, and you cannot use your assets as collateral to take a loan. However, a business loan offers the alternative of leveraging collateral like equipment or property to get a loan at potentially low-interest rates.
Working Capital Loan Or Business Loan, Which Is Better?
The kind of loan a vendor should consider will depend on one’s needs. If the business needs are short-term, like financing daily operations, then a working capital solution from KredX will be ideal. However, a business loan can be helpful if you are thinking long-term. It is vital to note that the amount, interest rate, and repayment period vary between the two options. The good news is that there are various providers for different business and working capital solutions, such as KredX, with its invoice financing service. Get your working capital solution from India’s Kredx invoice discounting platform today to meet your business needs.