Different Types of Loans You Can Take to Start a Business

Businesses at different stages often require financial support to manage operations, meet working capital requirements, or fund expansion plans. The loan type and amount vary based on the size and maturity of the business. Choosing the right loan for your business's needs helps maintain a stable cash flow and supports business growth. Let’s explore some of the key Business Loan options and their features to fulfil various financial needs.

Various Types of Business Loans

There are a variety of business loans that lenders provide to give financial assistance to businesses. Each of these loans has been created for a particular use and at a particular time in the business cycle.

1. Term Loan

A term loan is the most common type of loan provided to businesses by banks, non-banking financial companies, and microfinance institutions. Typically, a term loan is disbursed in one sum and is either secured or unsecured. The loan amount is determined by the financial institution's evaluation of the applicant's business's financial condition, credit profile, and ability to repay.

A term loan is best suited for businesses with stable cash flow and clearly defined business requirements. It can be commonly used for asset creation, capacity expansion, and long-term capital expenditure planning.

2. Unsecured vs Secured Business Loans

The main difference between an unsecured and a secured Business Loan lies in whether collateral is required. Unsecured term loans do not require collateral and typically have lower loan amounts, shorter repayment periods, and quicker access to funds due to higher lender risk.

Secured business loans, on the other hand, allow businesses to access a higher loan amount with a longer repayment tenure based on collateral. The interest rate charged on a term loan varies depending on the level of risk evaluated by the lender and the lender's internal policies.

3. Start-Up Loans

A start-up loan is designed specifically for entrepreneurs who are starting a business. Due to the fact that start-ups do not have an established history of operation, the financial institution relies primarily on the entrepreneur's background, business plan, and optional marketing strategy to evaluate the feasibility of the business and the ability to repay the loan.

A good business plan outlining the target market, revenue streams, and competitive advantage improves loan amount and approval chances. Start-up business loans help meet early-stage financial needs and support the expansion of new businesses.

4. Working Capital Loan

A Working Capital Loan provides the funds necessary to meet the short-term financial needs of a business to ensure the ongoing flow of funds into the business. A working capital loan is important to a company because it prevents interruptions in the normal course of conducting business.

This loan amount helps in purchasing raw materials, managing inventory, and meeting operational expenses. It is essential for businesses facing seasonal demand or delayed customer payments.

5. Overdraft Facility

An overdraft facility is a revolving line of credit, whereby a business can draw down funds beyond its available balance to the extent of the approved overdraft facility. Only the loan amount withdrawn (and not the total overdraft facility) bears interest. This facilitates flexible funding arrangements and is popular among small businesses.

This option helps businesses manage short-term cash flow gaps and unexpected expenses, and meet urgent business requirements without long-term debt. It offers flexibility, as interest rates apply only to the utilised amount.

6. Loan Against Property

A Loan Against Property can help obtain funds by pledging a residential or commercial property as security. The lender typically lends a portion of the property's current market value. Ownership documentation and the property details are usually required.

These types of loans offer a higher loan amount, relatively lower interest rates, and longer loan tenure. It is suitable for business expansion and long-term funding requirements.

Read Also: How Business Loans Take Your Business Higher?

7. Loan Against Equipment or Machinery

Equipment finance is a type of loan that helps businesses acquire new or upgraded machinery and tools. As equipment finance is mainly used by manufacturing units, where capital expenditures are considerable, the equipment itself is taken as collateral. 

A structured repayment schedule and relatively low-interest rates are two major advantages of equipment finance. Tax benefits can also be availed by the business, subject to relevant regulations.

8. Microfinance or Small Business Loans

Loans offered by microfinance institutions support small enterprises and informal businesses. These loans address basic business requirements and encourage financial inclusion. They are ideal for small traders and service providers.

This is because microfinance institutions, small finance banks, and regional rural banks focus on accessibility and simplified eligibility criteria. These small business loans support financial inclusion and local enterprise growth.

9. Business Loan For Women Entrepreneurs

Loans for women entrepreneurs address the issue of inclusive business funding through specifically designed loan options with competitive rates and flexible terms for the loan. This type of Business Loan usually has a minimum loan amount that is lower compared to others. This makes it suitable for a small business start-up or for small business expansion purposes.

Financial institutions normally request a business plan in a specific business plan format or business plan template that details the target market, cash flow, and business projections. An effective business plan enables the assessment of the loan amount, repayment term, and business growth.

To Conclude

Deciding on the right loan type is vital for meeting financial needs and supporting sustainable business expansion. Various types of business loans are available to address these requirements. Choosing the most suitable Business Loan helps maintain healthy cash flow, ensure timely repayments, and achieve long-term business goals.

Poonawalla Fincorp provides Business Loan options to fulfil the varying financial needs of businesses. With attractive loan amounts, competitive interest rates, flexible tenures, and streamlined loan application processes, we enable businesses to access timely and reliable financing.

FAQs

Which loan is the best for a business?

There are various Business Loan types you can get; however, the best loan for you depends on your business's cash flow and financial needs. Term loans are used for long-term investments, while working capital loans are used to finance daily operations.

Who is eligible for a Business Loan?

Business owners, self-employed individuals, private limited companies, and partnership firms are eligible for a Business Loan. Lenders assess eligibility criteria, business details, a good credit score, business documents, and stable cash flow.

How do I get funding for my business?

You should begin the process of obtaining business funding by preparing a traditional business plan detailing your business's financial needs and forecasts. Submit applications to banks, non-banking financial companies, or micro finance institutions with minimal documentation.

How to get a 50 Lakh loan for business?

To get a 50 Lakh loan for business, you need strong cash flow, proper business documents, and clear financial projections. A secured Business Loan, like a loan against property, improves approval chances and offers better interest rates.

How long does it take to get a Business Loan approved?

Approval timelines depend on the Business Loan type, documentation completeness, and lender processes. Digital applications and streamlined verification can significantly reduce turnaround time.