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Understanding the Different Types of Business Loans Available Today

Business owners might borrow money for various reasons, and they have several financing options available in India to solve their financial requirements. While the availability of so many Business Loan options is good, they may confuse the loan seekers and make the final decision challenging for them. That is why conducting proper research and comparing the various options is crucial before applying.

Before applying for business finance, one must choose the right type of loan that can fulfil their loan purpose, qualification requirements, repayment capacity, etc. Here are the most common types of Business Loans available today.

  • Term Loan

Term loans are one of the most common types of business finance options available in India. The sanctioned amount depends on the applicant’s business history. Generally, these are medium-term business loans, usually ranging from one to three years. Aspiring borrowers must mention the purpose of taking the loan while availing of their facility. Building working capital is the most common and efficient use of term loans. 

  • Working Capital Loan

Existing enterprises commonly use working capital loans to overcome financial crunches during off seasons and meet their daily business expenses such as paying salaries, purchasing raw materials, restocking inventory, purchasing or upgrading machinery/equipment, managing cash flow, etc. These loans are highly beneficial during sudden cash flow requirements. 

Manufacturers, retailers, traders, etc., involved in exporting or importing goods often avail of these loans. The repayment terms are shorter, and they are collateral-free loans that entrepreneurs can obtain without any asset, collateral, security, or guarantor.

  • Loan Against Property

Since many other Business Loan types are unsecured, they have smaller loan sanctions based on the applicant’s eligibility and repayment capacity. However, those looking for a bigger loan amount will need to pledge a property against the loan as collateral. If the borrower fails to repay the loan, the lending institution has the legal right to seize the collateral and sell it to recoup its money. 

The repayment tenure for these loans is longer, up to 15 years, and there are no end-use restrictions for these loan types. The sanctioned amount depends on the property’s value, and its ownership remains with the lending institution until the borrower repays the loan in full. 

  • Invoice Financing

Invoice financing is a suitable Business Loan for small businesses. Also known as invoice discounting or invoice factoring, it lets an entrepreneur borrow a loan against an unpaid invoice. When a company faces a cash crunch from supplying goods and raising invoices to receive payments, invoice financing helps meet regular expenses to sustain business operations and fulfil other orders. The loan provider sanctions a loan amount based on the raised invoice amount. After receiving the payment, the entrepreneur repays the loan according to the agreed tenure and interest rate.

  • Equipment Financing

Equipment financing, also known as a machinery loan, is a type of MSME loan ideal for companies involved in manufacturing businesses. Most manufacturing plants need costly equipment for their regular operations, and the loan they borrow to purchase this expensive equipment is called equipment financing. These are specific-purpose loans borrowers can use for machinery or equipment purchases only. These secured loans take the purchased machine as collateral against the loan amount. If the borrower fails to repay the loan, the lending institution can seize and sell the equipment to recoup their money. The interest rates for these loans are generally lower than term loans. 

  • Business Overdraft

Business owners holding fixed deposits with a financial institution can avail of a business overdraft against them. The finance provider approves these loans based on the applicant’s cash flow, FD terms, repayment history, etc. With this Business Loan type, the borrower withdraws only the required amount and pays interest only on the amount they utilise from the overdraft limit.

  • Business Loan for Women

Many financial institutions offer special financing schemes for female entrepreneurs. The Indian government encourages women to launch small to medium-sized businesses; many lending institutions help them financially. These loans provide specialised benefits, including ample loan amounts, flexible loan tenures, discounted interest rates, and faster loan processing.

  • Business Credit Card

Business credit cards are excellent funding options to fulfil short-term business expenses. They provide cash to a business when it is in dire need. These credit cards bring several other benefits to customers, including cash back, credit points, insurance coverage, etc. However, the interest rates on these cards are higher than normal. That is why most entrepreneurs use them as a last resort.

  • Cash Advance for Merchants

With a merchant cash advance, business owners can obtain an advance on their daily debit and credit card sales. The borrower must return the cash advance with a part of their daily credit sales. It helps businesses maintain sufficient cash flow while allowing borrowers to pay according to their daily sales.

While looking for an MSME loan, entrepreneurs must choose a loan type based on their business requirements and profile. Knowing the different types of Business Loans in India can help borrowers opt for the most suitable option for their venture. Financial institutions provide Business Loans to companies of different sizes at attractive interest rates and flexible EMI options. The application process is online and simple, and one can complete it by visiting the NBFC’s website. The approval is done after a brief in-person verification of the applicant. However, comparing different loan offers and choosing the best option is crucial to getting the right type of funding and repaying it on time. 

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