Types of Business Loans

Setting up a business and maintaining its establishment comes with a lot of challenges, and needs constant supply of capital. Even day-to-day operations like covering expenses such as salaries, rent, and utilities require a steady flow of cash.

 

Business loans, thus become a significant source of capital for growing your business. There are different types of business loans available in India, and hence it's important to know them in depth to choose the right one.

Here are 10 different types of business financing to choose from:

1. Term Loan

2. Start-up Loan

3. Working Capital Loan

4. Business Loan Against Property

5. Invoice Financing

6. Equipment Financing

7. Business Loan for Women

8. Business Overdraft

9. Business Credit Card

10. Cash Advance for Merchants

 

1. Term Loan

A term loan is the most common kind of business finance that is offered by lenders. The amount offered through this loan is majorly dependent on the credit history of the business. Typically, the tenure with this kind of loan ranges from 12 to 60 months. A loan term requires you to specify the purpose of use. It is best to cover capital expenditure.

 

Term loans can be further classified into:

• Short-term loans: Loans with a tenure of less than 1 year, often used for working capital needs

• Intermediate-term loans: Loans with a tenure of 1 to 5 years, suitable for expansion and growth projects

• Long-term loans: Loans with a tenure of 3 to 10 years, ideal for major investments and acquisitions

 

2. Start-up Loan

As the name suggests, a start-up loan is offered to cover the expenditure incurred when setting a new business venture. The borrower does not have a business vintage to support the loan application and the credit history is not the best. It offers capital for initial investments, equipment purchase, marketing and other associated business expenses required during launching of a new business.

 

The applicable interest rate, loan amount and tenure are decided upon only after the lender takes into consideration the expected turnover figures of the business. The business has to be established for a certain period before a startup loan is sanctioned.

 

3. Working Capital Loan

A working capital loan can be used to overcome any kind of financial crunch in the daily operations of the business. This type of loan is especially helpful when there is a sudden need for cash flow to meet day-to-day operational expenses such as purchasing inventory or paying salaries. 

 

Working capital loans are best suited for retailers, traders, manufacturers and other entities that undertake import and export. These are short-term loans used to cover immediate costs. These loans typically have a tenure of up to 1 year and are repaid from the business's cash flow.

 

4. Business Loan Against Property

As the name suggests this is the type of business loan that you can get against a collateral. You can use your commercial or residential property as collateral to secure this loan. It is a good fit for businesses demanding a loan amount of more than ₹50 Lakhs. 

 

You can get a loan against property by mortgaging your business or personal property for tenures ranging up to 20 years. The loan can be acquired by providing any kind of property, whether commercial or residential. The lender offers up to 70% of the value of the property through the loan. To get this type of business loan, lenders must ensure that the property in question is free from any kind of litigation.

 

5. Invoice Financing

Invoice financing is a type of business loan that provides funds against your outstanding invoices. This is especially when the business faces a gap between issuing invoices and receiving payments. 

 

The loan funds are provided against the invoices. As part of this loan agreement, the lender must clear off the debt when the payment is received. It is also popularly known as invoice factoring or invoice discounting, as both these terms fall under the broad category of invoice financing.

 

6. Equipment Financing

Equipment financing is a suitable option for businesses that undertake the manufacturing of any kind of goods. Clear from the name, this type of business loan can be taken for essential machinery and equipment needed for operations. The equipment itself serves as collateral for the loan.

 

Manufacturing businesses demand high-cost equipment that is essential to smoothly operate the business. Many times, there are new innovations in the market and this is where equipment financing can help serve the cost.

 

7. Business Loan for Women

With the growing demand, financing institutions are now offering special business loans that are curated for women. To further encourage this initiative, the Government of India has curated several schemes to encourage women to undertake medium-sized and small businesses. 

 

Business loans for women are offered through deals like flexible repayment tenure, quicker loan process, low-interest rates and much more.

 

8. Business Overdraft

A business overdraft is provided upon holding fixed deposits with a financial institution. When offering this facility, the lender analyses the business cash flow, repayment history, terms of fixed deposits and more. With the overdraft, the borrower can secure the required amount from the fixed deposit and pay interest only on the amount that is used. The funds can be used to serve any purpose related to the business.

 

9. Business Credit Card

A business credit card makes for a great funding facility to serve short-term requirements. It is an immediate way of obtaining cash when the business is in dire need. With a business credit card, customers are offered great benefits in the form of cash backs, credit points, insurance covers and more. However, a business credit card must be the last resort as the interest rate on this kind of financing is much higher.

 

10. Cash Advance for Merchants

The merchant cash advance includes an advance of capital provided on the daily sales of debit and credit cards. This is why it is important to ensure that the business includes enough cash flow to service the repayments. When a business is doing well, the amount that can be repaid is much higher.

 

The need for funds in a business can arise at any given point in time. Fortunately, you can now choose from a plethora of offerings made to serve any business type. It is advisable to understand your requirements and capacity to service the loan. Pick an appropriate business financial solution from the above-stated list of types of business loans depending on the nature of the business expenses and available budget.

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.