As a business owner, you might often wonder about the best possible way to fund a particular business need. A business loan can help you fulfil various purposes, such as expanding a business, purchasing additional assets like land or leasing a factory, buying equipment or inventory, or covering operating expenses such as overheads and salaries.
Business loans for small businesses can be unsecured or secured and are typically offered by banks, credit unions, and other financial institutions. Secured loans require borrowers to pledge collateral, such as property or equipment, while unsecured loans do not. Each loan product comes with its own qualification requirements, interest rates, terms and conditions, and benefits to apply for the most suitable one based on your needs.
In today's dynamic startup environment, it is necessary to know about the different types of business loan options offered in India and how they can help you expand your business.
Term loans are a form of credit offered by banks and other lenders to businesses. They come with a specific repayment schedule and a fixed interest rate. The loan can be repaid over a designated period in installments. Term loans of a shorter duration (less than 12 months) are called short-term loans, while loans up to 10 years can be classified as long-term loans.
The loan amount offered usually ranges from Rs. 1 lakh to Rs.1 crore. However, this can exceed at the lender's discretion depending upon the requirements and credit history of the business. The lender finalizes the repayment tenure for a term loan at the time of the loan application, and the approved fund is disbursed as a lump sum amount.
Working Capital Loan
Working capital loans are employed by businesses to meet short-term (up to 12 months) expenses. They are often used to purchase equipment/machinery, enhance inventory, manage cash flow for the off-season, purchase raw materials, pay salaries, or cover unexpected expenses. Working capital loans are typically unsecured, and as such, the interest rates offered are higher than long-term or general business loans.
When applying for a working capital loan, there are numerous points to consider. These include the business's credit history, the amount of money it needs, and the purpose of the loan. Companies that have a strong credit history and can provide a solid business plan are more likely to be approved for a working capital loan.
A startup loan is for new and upcoming business ventures. Such companies may not have an excellent credit history due to a lack of business vintage. Thus, the lender will consider the borrower's credit profile and that of the company to decide the loan amount, applicable interest rate, and tenure. A startup loan can be a helpful tool as it can provide the funds required to get started and give the company time to get its business up and running. The loan can also help the company avoid taking on too much debt or giving up too much equity in the early days of its development.
An overdraft facility allows businesses to withdraw cash from their account even if the account balance is zero. These loans are commonly used by companies who expect to receive money in the near future and need to bridge the gap now and then. It can also be used to solve temporary cash-flow problems or cover unexpected expenses. The sanctioned credit limit depends on the business's relationship with the bank, credit history, cash flows, and repayment history. The overdraft limit is revised by the lender every year and can be used in any manner as long as the interest amount and principal are repaid as per the decided terms. Overdraft facility is typically offered against collateral or securities, especially in terms of FDs with the bank. The interest rate is charged daily and only on the utilized amount from the sanctioned limit.
Loans against Property
An enterprise can mortgage its property to accumulate funds for business purposes. The tenure of such loans is usually 15-20 years, and lenders can finance up to 70% of the property's current market value depending on specific terms and conditions. The mortgaged property should not be under litigation, and the title to the property should be clean and free from encumbrance.
Letter of Credit
A Letter of Credit is given out by a bank on behalf of a business, authorizing the bank to pay a third party the amount specified in the letter. The letter of credit also stipulates the conditions that must be met before making the payment. Enterprises doing business overseas sometimes deal with unknown suppliers, thus requiring assurance of payment before performing any transaction. Therefore, the Letter of Credit plays a vital role in guaranteeing funding to the suppliers.
Invoice financing is mostly used by small businesses that encounter a time lag between raising invoices and receiving payment from clients. The lender provides funds against the amount raised in the invoice, with most institutions financing up to 80% of the invoice amount. Once the payment is received, the business clears the debt as per the decided tenure and interest rate.
Equipment Finance is a funding option offered mainly to enterprises engaged in the manufacturing sector to purchase new equipment/machinery or upgrade their existing setup. Equipment financing loans are specific, wherein the equipment in question is taken as collateral along with some other security. Business owners availing of equipment loans also enjoy tax benefits. The loan amount, interest rates, and repayment tenure offered vary from lender to lender.
Point-of-sale (POS) Loans
POS loans facilitate payment of a lump sum amount in advance to suppliers via their daily or future credit or debit card transactions to increase liquidity. The interest rates offered under POS loans are higher than other business loans. The repayment facility is linked with credit or debit transaction Point of Sales (POS) machines installed at retail shops, grocery stores, shopping malls, and supermarkets. The borrower has to repay the advance with a portion of the daily credit sales. Such a loan is that you can pay it back as per your daily sales. If the business is slow, the amount to return is also low, while one can repay more when the company is doing better.
Other Loan Schemes
To encourage the growth of small businesses, the Government of India has initiated several loan schemes such as PMEGP, CGTMSE, Mudra Scheme under PMMY, Standup India, Startup India, PMRY, etc. These schemes are designed with certain benefits to promote individuals, MSMEs, women entrepreneurs, and other entities that operate specifically in the trading, services, and manufacturing sectors. Various financial institutions provide loans under these Indian government business schemes, such as private and public sector banks, NBFCs, Regional Rural Banks, Micro Finance Institutions, and Small Finance Banks.
Each kind of small business loan is developed for a different business requirement. Before narrowing down your options, you'll need to consider your credit, your business's finances, the length of time you've been operating, and your reason for the loan. Choosing a business loan in India is advisable based on your business profile and requirement.
Poonawalla Fincorp offers different business loans for small businesses and MSMEs with minimal documentation, competitive interest rates, and zero hidden charges. Loans up to Rs. 30 lakhs are provided with flexible tenures ranging from 12-36 months, so you can achieve your dreams and take your business to greater heights.
How magical was the day when you discovered your career path? After a lot of research, putting in so much hard work, late nights, your heart and soul, you have become what you are today.