{"id":2143,"date":"2019-03-22T07:31:31","date_gmt":"2019-03-22T07:31:31","guid":{"rendered":"http:\/\/www.marketingwithmiles.com\/?p=2143"},"modified":"2019-09-04T08:03:19","modified_gmt":"2019-09-04T08:03:19","slug":"what-are-the-differences-between-working-capital-and-small-business-loans","status":"publish","type":"post","link":"https:\/\/www.marketingwithmiles.com\/what-are-the-differences-between-working-capital-and-small-business-loans\/","title":{"rendered":"What are the differences between working capital and small business loans?"},"content":{"rendered":"
On the surface, it may seem that there is not much difference between working capital and an SME.\u00a0 After all, one may argue, it is granted to the business and the unit can apply it to business purposes as per choice. However, this is not true. The main difference lies in the timing aspect. In accounting, there is a concept called as a matching concept. This means that a long-term debt should be applied for long term capex purposes. Alternatively, a short-term working capital loan should be applied for operational expenses. A mismatch can lead to serious solvency crisis for the business. There is a difference between working capital and small business loans and we shall study that in this article. Also, check\u00a0how to get a short-term loan<\/strong><\/a>.\u00a0<\/span><\/p>\n Understanding Small Business Loans<\/strong><\/p>\n Small business loans are extended by banks to business owners. The criteria to be eligible for such loans include a business operating period of at least 3 years, good personal as well as business credit scores and strong financial performance.<\/p>\n \u00a0The banks insist on submission of assets such as property, equipment and\/or vehicles that can be used as collateral cover. In the event of a default, the asset may be liquidated to recover the dues.<\/p>\n A small business loan application involves detailed documentation and submission of substantial supporting documents. The approval process is long drawn and time-consuming as the valuation of the assets has to be undertaken by a competent valuer. There is still a high chance that after the long waiting period and frequent correspondence with the bank, the loan may still be rejected.<\/p>\n It is mandatory that an SME loan is used specifically for the purpose stated in the loan application. For example, if the funds were requested to purchase a fixed asset, then the funds can only be applied for capex purpose. There is no scope to deviate from the initially declared usage, even if the business owner comes up with a better reason.<\/p>\n There is a heavy prepayment penalty in case of paying the dues and attempting to settle the loan.<\/p>\n A working capital loan<\/a> is a relatively flexible business financing option. It is mainly availed to fund the routine business expenditure namely raw material purchase, payment to suppliers, wages and other operating expenditure. It can be obtained even by a new, relatively nascent business. This is because, irrespective of the vintage or size of the business, every business would undertake business activities.<\/p>\nUnderstanding a Working Capital Loan<\/strong><\/h3>\n