Large and small businesses often need additional funding to meet their day-to-day business needs. The funding required also depends on the nature of the business - is it capital-intensive and what are its stages of development in terms of start-up, growth, or maturity? In general, businesses need the most funding in the early stages and from a growth perspective. Let’s discuss some of the major types of Business Loans approved by financial institutions in India.
Various Types of Business Loans
1. Term loan
Loans can be secured
or unsecured. The amount available is based on the business's
credit history. The term is fixed, between 1 to 5 years if unsecured business
loan or up to 15 - 20 years for a secured
Business Loan. Term loans are taken for a specific purpose,
usually for capital expenditure. The lender distributes the sanctioned
funds in a consolidated amount.
2. Start-up loan
Start-up loans are for new business ventures. Applicants for such
loans may not have the best credit history due to a lack of business
vintage. Thus, to determine the eligibility of a
Business Loan, the lender will consider the personal credit
profile of the borrower with the company. Current turnover figures and
other financial matters are also considered to determine the loan
amount, tenure, and applicable interest rate.
3. Letter of
Credit
A letter of credit is a type of credit limit
used majorly in trading businesses in which the bank or lender
provides funding guarantees to enterprises that deal in
international trade. It can be used for both import and export
purposes. Individuals who are doing business overseas tend to deal
with unknown suppliers, so for that, they require assurance of
payment before performing any transaction. Therefore, a letter of
credit plays an important role in providing payment assurance to the
suppliers.
4. Working capital loan
A working capital
loan is a type of small Business Loan taken out on a day-to-day
basis to alleviate the cash crunch. It balances the cash flow needed
to run a business. These loans are also helpful to meet the cash
shortage during the off-season or to meet the demand during peak
season. The most eligible applicants are service providers,
manufacturers, wholesalers, retailers, or traders involved in exports
and imports.
5. Loan against property for SME
In this, the borrower must mortgage his property to get funds for
business purposes. The borrower may apply for funds against
residential or commercial property. Lenders can lend up to 70% of the
current market value of the property. The title of the property should
be clean and litigation-free. The term of such a loan is 15-20 years
depending on the terms and conditions laid down by the lender.
6. Invoice financing
It’s also called
invoice discounting or invoice factoring. This type of funding is
especially for small businesses that face delays in raising invoices
and receiving payments from clients. Lenders can lend up to 80% of
the invoice amount. Once the business has received the payment, it
clears the debt according to the fixed term and interest rate.
7. Equipment lending
These are the
manufacturing businesses that usually opt for equipment lending or
machinery loans. Manufacturing units need expensive equipment to run
their business and to buy machines, out of all kinds of Business
Loans, tool financing is the most preferred. This is because
the machinery loan is specific, with the equipment in question being
taken as collateral along with some other securities. Interest rates
may be lower than what is charged on another unsecured loan.
8. Business loans for women
Some financial
institutions have special schemes for Business Loans for women
entrepreneurs. The Government of India has also taken initiatives
to encourage women to set up small to medium-sized businesses.
Benefits of special loans for women entrepreneurs include flexible
loan amounts, discounts on standard interest rates and faster loan
processing.
9. Equipment finance or machinery
loan
Equipment finance or machinery loan is a funding
option offered to borrowers to purchase new equipment/machinery or
upgrade an existing one. Equipment finance is mainly used by large
enterprises and enterprises engaged in manufacturing. Enterprises or
business owners who get equipment finance or machinery loans also
enjoy tax benefits. The interest rate, loan amount, and repayment
period offered vary from lender to lender.
10.
Overdraft
An overdraft facility is offered against
securities or collateral, especially in respect of a fixed deposit
in a financial institution. The lender analyzes the borrower's
credit history, relationship with the institution, business cash
flow, and payment history before approving a fixed overdraft limit.
The borrower can withdraw the required amount and pay interest only
on the amount used. The funds can be utilized in this manner till
the principal and interest are paid on time.
Conclusion
It is advisable to choose a Business Loan based on your business profile and needs. The information provided above will help you determine the most appropriate type of financing for your venture as a business owner.