Businesses, regardless of their size, often need financial support. Whether the company wants to thrive or aims to expand, external capital support can be required in the ever-changing, unpredictable markets. This is where business loans come in, helping businesses meet their goals, set up required machinery, or fund operational activities.
Irrespective of the need, different types of business loans are available in India to meet the business's specific requirements. Business owners must know these 12 types of business loans to make informed decisions and spend their loan amount wisely.
A new business will likely experience irregular cash flow or a seasonal sales cycle. But, certain costs, such as purchasing raw materials, paying salaries, and hiring the workforce, are inevitable and must be credited regularly.
Acquiring a working capital loan acts as a lifeline for the business, providing relief and security. It enables the company to sustain itself at any given time, giving the owner the confidence to navigate financial challenges. The loan tenure varies from bank to bank, depending on the business's financial capability and future goals.
Businesses can choose short-term, intermediate-term, or long-term options for their term loans. Short-term loans are usually unsecured loans with a tenure of 1-2 years, whereas loans above three years are called long-term loans. These are the most favoured term loan types due to their market-competitive rates and tenure lifespan.
Businesses can use this loan for business-related activities without restrictions for long-term goals and growth strategies. The loan amount is sanctioned depending on the business's creditworthiness, and a predictable repayment schedule allows flexibility to carry out business activities.
In the international market, a letter of credit is a vital financial instrument issued by a bank to a bank in a different country. It assures timely payment to the seller or the exporter from the buyer.
If the buyer cannot pay the seller for any reason, the bank accounts will pay the due amount on behalf of the buyer. This enables smooth transactions in the international market, allowing seamless functionality of trade operations between both parties.
Bill discounting creates immediate cash flow into the system by selling a company's pending receivables or bills at a discounted rate. Businesses often use this financial technique to get quick cash for pending transactions.
For example, you have sold goods worth ₹5,00,000 to Mr. Joshi, and he’s issued a 120-day letter of credit. However, if you (Mr. Shah) want to receive funds before the completion of 120 days, the bank will charge an interest rate called a discount for the seller. This will allow you to access the payment for the goods at a discounted rate of ₹50,000, crediting you with a sum of ₹4,50,000. However, Mr. Joshi will pay the total amount of ₹5,00,000 to the bank on the 45th day.
One of the quickest ways to secure a loan is through an overdraft facility. Even if the bank account balance falls to zero, one can withdraw money with an overdraft facility using collateral such as fixed deposits from the bank and pay interest only on the funds used.
The process includes verifying the borrower’s creditworthiness by browsing their credit history, assessing repayment efficiency, and analysing the business cash flow to understand the financial capabilities.
Equipment financing is one of the ideal loan choices for businesses in the manufacturing sector. Due to fast-paced innovations and emerging technologies, the need to utilise machinery can arise anytime.
Such a case leads manufacturers or businesses to secure machinery loans against collateral (machine purchased acts as collateral) on their equipment financing.
Businesses of varied sizes and industries get help from various financial institutions and banks to run their business. The same applies to women entrepreneurs who want to build sustainable businesses.
Several financial institutions offer separate financing schemes and business loans to encourage women and initiate as many women entrepreneurs as possible. Such business loans in India by government have also curated financial schemes for small and medium-sized businesses that women run. They encourage budding women entrepreneurs through schemes like the Mudra Yojana, Annapurna Scheme, and Stand Up India, among many others.
Whether a bootstrapped business or a company raised through funds, money is the prime source for achieving attainable goals. However, many startups face a financial crunch during their initial years and need help growing a company with a smooth ride with a handful of revenue streams.
For this, startup loans prove beneficial. Even after establishing the business for a certain period, a loan amount can be sanctioned based on the unique business idea and the expected turnover. This loan amount can be used for initial investment, purchase of equipment, or company marketing efforts.
When a rapidly expanding business needs more than 50 Lakhs, a business loan against property can be an option. One can avail of a loan by collaborating on commercial or residential property to secure funds for a new project, settle consolidated debts, or initiate an expansion of the business.
While backing with a legitimate property works in the lender's favour, borrowers can benefit from competitive interest rates and an extended repayment tenure period between 120 months and 240 months.
Several small companies opt for gold loans for their business needs. Gold loans are an apt option for short-term loan requirements. They are very flexible, offering quick fund processing with minimal documentation.
This loan method helps a business navigate several small-scale needs, and the interest accumulated can be paid in installments as bullet repayment (interest + principal amount).
Project loans, called project finance, are sanctioned to businesses or projects valued for their significant contribution to large-scale projects. This includes infrastructural development, real estate development, or the formation of large-scale manufacturing units.
These projects are tailored to meet specific needs, using well-thought-out and executed processes to drive complex ventures to success.
One way to obtain business loans without collateral is to secure an unsecured business loan. Before sectioning, this unsecured business loan is first measured by the business's creditworthiness, profile, and estimated profitability of the borrower to safeguard the lender's interest from unexpected circumstances.
These loans are beneficial when emergency funds, inventory purchases, or unexpected circumstances arise. Since they are free from collateral, they are attractive to the startup ecosystem and SMEs.
While it is essential to understand the diverse Indian financial landscape, it is equally important to understand the underlying features that make it possible, such as varying business loan interest rates, tenure periods, collateral, and non-collateral options.
Moreover, each business model is unique and needs to be fulfilled with a tailored business loan. Finding and choosing a business loan for a new business requires extensive research, comparing different options, and selecting the best possibility according to your business needs.
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