Loan to start a business

Different Types of Loans You Can Take to Start a Business!

July 28, 2022 • 198 views
Author: PoonawallaFincorp Category: Business Loan

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 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.

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