Q.Distinguish between working capital finance and term finance.
Working capital finance is short-term credit (such as an overdraft or cash credit) provided by a commercial bank to fund a business's day-to-day operating needs — chiefly purchasing raw material or stock — before that stock is sold and converted back into cash. It is typically repayable within a year and is not usually secured against a specific fixed asset.
Term finance, by contrast, is medium- to long-term credit, usually secured against the asset being financed, used to fund the purchase of fixed assets such as machinery, equipment, or business premises. It is repaid over several years, matching the useful life of the asset it funds.
Working Capital Finance vs. Term Finance
| Basis | Working Capital Finance | Term Finance |
|---|---|---|
| Purpose | Day-to-day running needs | Fixed assets |
| Duration | Short-term (within a year) | Medium/long-term (several years) |
| Typical form | Overdraft, cash credit | Secured term loan |
Working capital finance funds short-term, day-to-day needs; term finance funds long-term fixed-asset purchases and is usually secured.
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