All sizes and types of businesses need funds to meet the day-to-day requirements and expand the business. The funding largely depends on the nature of the business. Whether the business is capital intensive and what stage it is in. If the business is in the growth stage, it will need more funds than a business that is in the maturity stage. A lot of businesses need funds in the inception and growth stage as compared to maturity. There are several loan options for business owners to choose from and each loan comes with its unique features and benefits. In this article, we discuss the types of business loan in India that you can consider to grow your business.
1. Working capital loan
A working capital loan, as the name suggests, is a loan used by businesses to meet their day-to-day requirements. It includes expenditures like paying salaries, buying raw materials, managing the cash flow, or buying equipment. The loan is usually short-term in nature and should be used only for the day to day expenditure. It has a repayment tenure of up to 12 months and is also known as a collateral-free loan. You do not need to submit any collateral with the lender to get access to funds but the interest rate offered will be slightly higher as compared to the long-term loans. The lender will have a limit for the business and the amount can be utilised for the specific purpose only.
2. Term loan
The term loan is one of the most popular business loans. It has to be repaid in regular payments over the tenure and it is categorised into short-term and long-term loans. The tenure of the term loan ranges from 12 months to 10 years and you can use it for any purpose in the business. The short-term loan will have a duration of 12 months to 3 years and the long-term loans can go as high as 10 years. It also has a high loan amount of up to Rs. 1 crore and it is dependent on the size of the business. The loan amount and tenure will be finalised at the time of loan approval. The funds can be used for regular business operations or to meet capital expenditure.
3. Bill discounting
Bill discounting, also known as invoice discounting is a form of funding where the sellers get the amount in advance at a discounted rate. The lender will charge a certain percentage as a fee and will deduct it from the amount they pay. When you sell goods on credit, you issue an invoice to the customer. However, the invoice is due for payment at a later date but if you need funds today, you can use the invoice and contact a lender. The lender will provide the funds and the customer will make the payment on the due date. The customer will not know about the transaction you have carried out with the lender.
4. Letter of credit
The letter of credit is another type of credit limit which is used by trading businesses where you can get a funding guarantee. It is ideal for enterprises that engage in international trade. You can use the letter of credit for import and export. When you engage in international trade, you will deal with unknown suppliers which is why they need the reassurance of payment before you perform any transaction and the letter of credit will play a strong role in providing this assurance.
5. Equipment Finance
A machinery loan or equipment finance is a loan that is offered for the purchase of new or refurbished equipment or machinery. It is used by large organisations that are engaged in the manufacturing sector. You may have to make a downpayment for the loan and the terms of the loan will vary from lender to lender.
6. Overdraft loan
The overdraft facility is a type of funding that is offered by banks to the account holders and it allows you to withdraw cash from your account even if the balance is zero. You will have to pay interest only on the amount you utilise from the limit on a regular basis. This limit will be based on your relationship with the bank, repayment history, cash flow, and credit history. You can have the overdraft limit revised each year and you may use it in any manner as long as you pay the interest on time. The loan will be offered against collateral.
7. Govt. scheme loans
There are various loan schemes offered by the Government to promote individuals, women entrepreneurs, MSMEs and others engaged in trading, manufacturing, and service sectors. This loan will be offered by different financial institutions like NBFCs, private and public sector banks, small finance banks, and microfinance institutions. Some schemes include Startup India, Mudra Scheme, Standup India, etc.
These are the most common business loans available in India. Now that you have an idea of the borrowing options, it helps to make a well-informed decision by understanding the terms and conditions of the loan. The loan amount, interest rate, and tenure will vary from one lender to another. Additionally, some loans may have a collateral requirement while many others don’t. You can avail of a business loan at a nominal interest rate and enjoy low and flexible EMIs.
The interest rate on a secured loan will be lower than that of an unsecured loan because of the lower risk. You can find the best loan by comparing the different loan deals offered by different lenders and then make a decision. If you have a specific loan requirement for the purchase of equipment or to meet working capital needs, you need to choose the specific loan only. Apart from that, you have several borrowing options to consider and take your business to new heights. Choose a reliable and trustworthy lender for your loan.