All kinds of businesses, small startups or large corporations, need regular investments and an inflow of funds to keep the day-to-day operations running. The funds required may differ based on the nature of the business and at various stages of the business. However, most businesses typically need a maximum amount of funds during the initial and expansion stages. As a business owner, one of the best ways to raise the required funds for your enterprise is to apply for a business loan.
Understanding the several types of business loans offered in India is crucial. This knowledge will empower you to select the loan that best aligns with your business’s financial requirements.
● Term Loan
Term loans are one of the most common types of financing for businesses in India. They are extended by all financial institutions, including banks and NBFCs (non-banking financial companies). Typically, term loans are availed by aspiring business owners and startup entrepreneurs who need capital investment to set up their enterprise and meet the initial expenses to get the business up and running.
In this type of loan, you can borrow a specific amount based on your eligibility for a predetermined fixed period and at a fixed interest rate. There are three kinds of term loans, which are distinguished by the repayment tenure. The maximum repayment tenure can range from a few months to years, as per the lender’s policies.
In most cases, when you apply for a term business loan, the lender may require you to offer collateral as security against the funds you borrow. Hence, it is categorized as a secured business loan. The best thing about this loan is that the interest rates are affordable since it involves pledging an asset. This also makes repaying the loan easier.
● Unsecured Business Loan
Unlike secured or collateral business loans, unsecured business loans do not require you to provide any asset as security to the lender to borrow the funds. Lenders extend this loan based on your creditworthiness, financial capacity, and business credentials.
Unsecured business loans are a boon for small businesses with no assets to pledge and raise the funds they need. It is also a great funding option for businesses that need quick funds without risking their assets. However, you must know that unsecured business loans come with a higher interest rate as compared to secure business loans.
● Startup Loan
As the name says, a startup loan is a loan for small business enterprises. It is designed to help startup owners get the funds they need to implement their business ideas and achieve their dream of being entrepreneurs.
Today, there are millions of startups in India, and the numbers are only expected to grow in the future. These loans can help you get the initial capital investment you need to set up your venture. Another significant aspect of a startup loan is the support from different government schemes under which you can get the funds at an affordable interest rate, making you feel supported in your entrepreneurial journey.
Also, most lenders that extend startup loans have flexible terms to accommodate the unique challenges you may face as a new business owner.
● Letter of Credit
A letter of credit or LC is a financial instrument that banks and other financial organisations issue to business owners, especially those who carry out international trade transactions. In a letter of credit arrangement, the lending organisation acts as a guarantor, guaranteeing payment to the supplier or the exporter on behalf of the business owner.
It is a useful way of getting loans for small businesses that deal with international traders, as it reduces the risk for both parties involved in the transaction. As a business owner, you get the desired funds for the business, and the other party gets an assurance of payment from the lender. Thus, it ensures smooth and secure trade operations.
● Cash Credit
Another popular type of business loan to raise working capital is cash credit. It is a short-term loan offered to businesses, and you can withdraw funds up to a specific predetermined limit as determined by the lender. The limit is computed based on critical factors, such as the working capital in your business and future financial growth projections.
One of the most significant benefits of cash credit is that the interest rate applies only to the amount you withdraw and not to the whole credit limit available to you. This gives you the flexibility and access to funds required for daily operations and repay the amount without any hassles.
● Overdraft
Just like cash credit, the overdraft is a short-term business loan that allows you to withdraw funds over and above the existing balance in your account. Many banks and financial organisations offer this business loan with a predetermined credit limit. Also, you must know that to withdraw the funds, you may have to provide collateral to the lender as security against the funds you borrow.
The interest charged on an overdraft facility is usually affordable, making it a go-to business loan option for many small business owners. Also, the interest rate is levied only on the amount you utilise, and the lenders do not have any restrictions on the end usage of the funds. So, as a business owner, if you have any shortage of funds or need access to funds quickly, you can opt for an overdraft and manage cash flow fluctuations.
● Equipment or Machinery Loan
An equipment finance or machinery loan is specially offered to business owners to help them buy new equipment or upgrade existing equipment. It is mainly used by business entities in the manufacturing sector that constantly need to adopt new technology or machinery to improve their production efficiency or speed.
Apart from helping you get the funds you need to buy new equipment, this loan can also help you enjoy valuable tax benefits. The maximum amount you can borrow may vary based on the type of machinery you want to purchase and your business credentials.
Also, the interest rate and the repayment tenure may vary from one lender to another. You can use the business loan EMI calculator to know the exact EMI payable based on the interest rate levied by the lender and your repayment tenure.
Conclusion
As you can see different business loan options are available in India, and you can choose the right type of funds to suit your business goals and financial credentials. No matter the kind of loan you want to apply for, make sure that you work with lenders with a reputation for offering everyone the best business loan solutions.
