Types of Business Loans
Types of Business Loans 10 Best Options for You
Business finance may seem tricky
at times. Especially in a dynamic environment like today, as a business owner,
you may often find yourself wondering about the best possible way to fund a
particular business need. Business needs can vary between purchasing assets
such as land or leasing a factory or shop or purchasing new machinery, or
working capital requirements, or basic operating expenses such as overheads and
salaries. However, it is important to note that there are different types of
business loans in India that are best suited for a particular situation.
Here are 10 different types of
business loans available for entrepreneurs in India.
1. Term Loan
One of the most common types of
business finance is a term loan. The loan could be secured or unsecured in
nature. The amount available depends on the business’s credit history. The
tenure is fixed, ranging between 1 and 5 years if unsecured, or up to 15 - 20
years for secured business loans. A term loan is taken for a specific purpose,
generally for capital expenditure. The lender disburses the approved fund in a
lump sum amount.
2. Start-up Loan
A start-up loan is for new
business ventures. Applicants for such loans may not have a great credit
history on their company due to a lack of business vintage. Thus, to judge the
business loan eligibility, the lender will take into account the borrower’s
personal credit profile along with that of the company. The current turnover
figures and other financials are also considered to decide the loan amount,
tenure, and interest rate applicable. The business should be established, and
the applicant must submit proof of the business existence and registration.
3. Working Capital Loan
Working
capital loans are types of small
business loans taken to overcome the shortage of cash to
operate a business on a day-to-day basis. It generates a balance in cash flow
necessary to run a business. This loan is also helpful to deal with a shortfall
of cash during the off-season or meet demand during a peak season. Most
eligible applicants are service providers, manufacturers, wholesalers,
retailers or traders engaged in exports and imports.
Note: To understand the monthly
instalment, you can take the help of a business loan
EMI calculator available on our website.
Must Read: What are the
Benefits of Business Loan?
4. Loan against Property for SME
At Fullerton India, we
offer SME loans
secured against property for businesses whose loan requirement
exceeds Rs. 50 lakhs. Here, the applicant has to mortgage his/her property to
avail of funds for business purposes. The borrower can apply for funds against
either a residential or commercial property. Lenders can finance up to 70% of
the current market value of the property. The title to the property should be
clean and free from encumbrance. The mortgaged property should also be free of
litigation. Tenure of such loans is up to 15 - 20 years, depending on the terms
and conditions set by the lending institution.
5. Invoice Financing
Invoice financing is also known
as invoice discounting or invoice factoring. This type of funding is especially
for small businesses that encounter a time lag between raising invoices and receiving
payment from the clients. The financial institution provides funds against the
amount raised in the invoice. The lender can finance up to 80% of the invoice
amount. Once the business receives the payment, it clears off the debt as per
the decided tenure and interest rate.
6. Equipment Financing
It is the manufacturing
businesses that usually opt for equipment financing or machinery
loan. Manufacturing units require costly equipment for the operation
of their business. And to purchase the machines, out of all the types of
business loans, equipment financing is the most preferred one. This is because
machinery loans are specific in nature, wherein the equipment in question is
taken as collateral along with some other security. The interest rates could be
lower than those charged on term deposits.
7. Business Loan for Women
Some of the financial
institutions have special schemes on business loan
for women entrepreneurs. Even the government of India has
initiatives in place to encourage women in establishing small to medium-sized
businesses. The advantage of specialized loans for women entrepreneurs includes
a flexible loan amount, start-up loan, discount on the standard interest rates,
and a faster loan process.
8. Overdraft
An overdraft facility is provided
against securities or collateral, especially in terms of fixed deposits with
the financial institution. The lender analyzes the borrower’s credit history,
relationship with the institution, business cash flow and the repayment history
before approving a certain fixed overdraft limit. The borrower can withdraw an
amount required and pay interest only the utilized amount. The funds can be
used in this manner as long as the principal and the interest amount are repaid
as per the decided term.
9. Merchant Cash Advance
Here, the financial institution
provides an advance of capital on a portion of daily debit card sales or
credit. The borrower has to then repay the advance with a portion of the daily
credit sales. The borrower must ensure that he/she has enough cash flow to
manage the payments. The advantage of a merchant cash advance is that the
person has to pay as per the daily sales. So, if the business is slow, the
amount to return is also low, and when the business is doing well, one can
repay more.
10. Business Credit Card
While a business credit card is
not the very first option that business owners may select to finance their
needs, it is still great for a short-term and immediate funding option. If the
business owner is in need of fast cash at the same time wants to earn rewards
against payments done on debt, then a business credit card is a right option.
Several financial institutions attract customers to this type of funding by
offering benefits such as introductory cash back on spends protection/insurance
cover, etc. However, the rates could be higher than that of traditional
business loans.
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