Any firm, no matter how little, medium-sized, or huge, will always need more cash flow to cover daily expenses. Getting a loan has different goals based on whether you need it to launch, fund, or grow your company. Your type of business will determine how much money you receive. Is your brand expensive to build? Which stage of development is your company in—initial, growing, or mature? Not every firm operates in the same way. In order to address various company scenarios, financial institutions must therefore provide a variety of business loans.
Check-out 10 Different Types of Business Loan You Can Choose From
- Term loan
- Start-up loan
- Working capital loan
- Loan against property
- Invoice financing
- Equipment financing
- Business overdraft
- Business loan for women
- Business credit card
- Cash advance for merchants
Term loan
One of India’s most common types of business loans that leading lenders offer is a term loan. The loan amount sanctioned depends on the credit history of the business. Generally, the loan tenure for a term loan is anywhere between 1 and 5 years. When you apply for such a loan, you need to mention the purpose of use. The most efficient use of a term loan is for covering capital expenditure.
Start-up loan
As the name suggests, a start-up loan is suitable for entrepreneurs aspiring to launch a new business venture. These applicants do not have an excellent credit history since their company lacks business vintage. Therefore, to assess the individual’s eligibility for a business loan, lenders consider the borrower’s personal credit profile apart from the company’s. To decide the loan amount, tenure, and applicable interest rate, lenders consider the current turnover figures and other financials. Before applying for the loan, the applicant must establish the business. Proof of business existence and registration is to be submitted at the time of the application.
Working capital loan
Enterprises use working capital loans to overcome any kind of financial crunch and meet daily business requirements. The end use of this type of business loan can be for managing business cash flow, paying salaries, increasing inventory, purchasing raw materials, investing in machinery/equipment, etc. The loan is beneficial when a sudden need for cash flow arises. Traders, retailers, manufacturers, and other entities involved in import and export can avail of a working capital loan. The repayment tenure for a working capital loan is short, up to 12 months. Moreover, it is a collateral-free loan, so the borrower does not have to pledge any collateral or asset with the lender.
Loan against property
When businesses require a loan of more than Rs. 50 lakhs, they should opt for a loan against property. An individual can avail of this type of loan by offering a property as security. The repayment tenure for a loan against property ranges between 10 and 20 years. The borrower must mortgage the property to receive funds through this type of business loan. There is no restriction on the type of property the borrower can offer as security. It can be both residential and commercial. The lender generally provides a loan equivalent to 70% of the property’s value. But, the property offered as security needs to be free from any kind of litigation.
Invoice financing
Invoice financing is suitable for small businesses. It is also known as invoice factoring or invoice discounting. When companies face a lag between raising invoices and receiving payments, the business loan helps in meeting regular financial requirements. The lender provides funds against the amount raised in the invoice. The loan amount the financial institution can provide is up to 80% of the invoice amount. After the business receives the payment, it repays the loan amount as per the agreed-upon interest rate and tenure.
Equipment financing
One of the types of business loans in India ideal for manufacturing businesses is equipment financing or machinery loan. Most manufacturing units require costly equipment for operations. For purchasing this expensive equipment, companies require equipment financing. Such a loan is specific, where lenders take the equipment and some other security as collateral. Compared to a term loan, the interest rates for machinery loans is generally lower.
Business overdraft
A business can avail of a business overdraft only when it holds fixed deposits with the financial institution. The lender considers the business repayment history, cash flow, fixed deposit terms, and more to approve this loan. With this type of loan, the borrower can withdraw the required amount and pay interest only on the amount utilized.
Business loan for women
Some banks and lenders offer a separate financing scheme for women entrepreneurs. The objective is to encourage women who are launching small to medium-sized businesses. Such specialized benefits include flexible loan amounts, discounts on interest rates, and faster loan processing.
Business credit card
To fulfill short-term requirements, a business credit card is excellent. It lets businesses obtain cash when they are in dire need. Business credit cards provide customers many benefits, such as credit points, cash backs, insurance covers, etc. The interest rate on this type of financing is much higher. Therefore, a business credit card should be the last resort.
Cash advance for merchants
With a merchant cash advance, you can obtain an advance of capital on the daily sales of debit and credit cards. The borrower needs to return the advance with a part of the daily credit sales. It is vital for businesses opting for this type of business loan to maintain sufficient cash flow for the repayments. The benefit of a merchant cash advance is that the borrower has to pay according to the daily sales.
Best Business Loans for You
When you have a proven track record of running a successful business, obtaining a Business Loan becomes easier. Lenders are confident in your ability to manage your business effectively and repay the loan on time.
So, if you have been running a business for a significant amount of time, the following are the business loans that are most suitable for you:
Term Loan: If you are looking for a Small Business Loan, Term Loan can be the most suitable option for you. A Term Loan provides you with the necessary funds to meet your business requirements. These loans come with higher loan amounts and longer repayment tenures, Also, they are provided at competitive interest rates.
Line of Credit: A line of credit is a popular type of Business Loan offered by financial institutions. This loan option is preferable in the case of an emergency since it provides you with a credit limit that you can access as needed. Like a business credit card, you can withdraw funds and only pay interest on the amount used. Lines of credit offer flexibility and lower interest rates. They are ideal for small businesses requiring immediate access to cash without the need for a lengthy loan application process.
Final Thoughts
Choosing a business loan based on your business profile and requirement is best. After you learn about the different types of business loans in India, you can decide the type of financing most suitable for your venture. Business loans are available at nominal and attractive interest rates with flexible and easy EMIs. Most banks and financial institutions offer business loans. The application process is simple. Visit the official website of the lender or the bank and fill out the online application form.
FAQs
1.What is Cash Credit Facility?
Cash credit facility is a type of short-term loan provided by financial institutions to businesses, allowing them to borrow funds up to a predetermined limit based on their creditworthiness. It provides flexibility for businesses to withdraw and repay funds as per their cash flow needs, making it a convenient source of working capital.
2.What is a Bank Guarantee?
A bank guarantee is a financial instrument issued by a bank on behalf of a customer, promising to cover the financial obligations of the customer to a third party if they fail to fulfill their contractual obligations. It provides assurance to the recipient that they will be compensated in case of non-performance or default by the customer, serving as a form of security or risk mitigation in various business transactions.
