No matter how small, medium or large a business is, they will always require additional cash flow to meet their daily needs. The purpose of getting a loan varies depending on whether you need it to start, run, or expand your business. The amount of funding depends on your type of business. Is your brand capital-intensive? At what stage of development is your business - inception, growth, or maturity? All businesses don’t work in the same way. Thus, financial institutions need to offer several types of business loans to address different business situations.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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