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10 Types of Business Loans in India [Choose the Best]
For a business, the trickiest part has always been ‘managing and procuring Finance.’ In the world, we live in today, which is such a dynamic and fast paced, it becomes challenging to decide the type of business loan you want to opt for when there are multiple options available. Each business is different, and the business need can vary from the amount of working capital needed, the other purchasing assets, to necessary operating expenses such as salaries or overheads, etc. Hence, it is a personal choice when it comes to choosing your own type of business loan.
Here is a brief list of the different types of business loans in India which are available currently:
1. Term Loans
Amongst the different types of business loans available, a term loan is the most common type. The nature of the loan could be either secured or unsecured. The amount of the loan which gets sanctioned depends solely on the credit history of the business. In the case of a secured loan, the tenure for repayment of the loan is less as it ranges between 1-5 years, and in the case of an unsecured loan, the tenure of repaying the loan ranges between 15-20 years. A term loan is generally taken for a specific purpose, mainly for the expansion of capital expenditure. The lender typically disburses the approved amount in a lump sum.
2. Start-up Loan
A start-up loan is considered a business loan for a new entrepreneur in India, which is generally taken by the new ventures to start their business or expand it. All the applicants for this loan may or may not have an excellent credit history of their company due to being a start-up. Hence, the loan here is given based on the credibility of the idea. To check the business loan eligibility, the lender considers the borrower’s personal credit profile and the credit profile of the company. To get the business loan for a new entrepreneur in India, the start-up owner needs to submit the relevant documents which show the current turnover and various other financial transactions.
3. Equipment Financing
These are the types of business loans in India taken up by the manufacturing businesses to get finances for their equipment or machinery. Manufacturing units require high-end and costly equipment machinery for the running of their business. To purchase the machinery, out of the different types of business loans, equipment financing is the apt one. Equipment financing loan is, where the equipment is taken as collateral along with other securities. In terms of interest rates, they are generally lower than those charged on the term deposits.
4. Working Capital Loan
In financial terms, working capital is the one we require to run the business, and this capital is used for everyday transactions. The working capital loan category comes under the small loan, which the small business owners take to overcome the cash crunch. Start-ups, due to being new in the business, have a shortage of cash to operate the business daily. Hence, the small business owners require the working capital loan to maintain their cash flow regarding the outflow or inflow. Especially during the offseason, there could be money issues for the start-up, and this loan comes in super handy during that time. The common eligible applicants include:
- Service providers
- Manufacturers
- Wholesalers
- Retailers
- Traders
5. Merchant Cash Advance
As the name suggests, this is the kind of loan where the financial institution gives an advance capital in terms of the daily portion of the debit card and credit sales daily. In this case, the borrower is expected to return the advance with their daily credit sales portion. However, the borrower must ensure a time when they have the proper cash flow to manage all the payments. The merchant cash advance loan’s primary benefit is that the borrower will be expected to pay daily as per the daily sales. Hence, which means if the business is running slow, then the returns will also be slow. Whenever the business picks up the pace and is doing well, one can quickly repay the amount.
6. Loan Against Property for Small Enterprises
These are the SME loans provided against the properties for the businesses whose loan amount is more than Rs. 50 Lakhs. In this case, the applicant is expected to mortgage their property to avail the funds to run the business. In this case, the borrower can apply for the funds against either the commercial or residential property. Lenders are allowed to finance up to 70% of the present value of the property. One thing to note is that the property’s title should be clean and free from all sort of encumbrance. Also, the property which is mortgaged should be free from litigation. Generally, the ‘Loan Against Property for Small Enterprises’ tenure is somewhat up to 15-20 years maximum. However, on the whole, the tenure depends on the different terms and conditions which are specified by the lending institution.
7. Loan for Women
Among the different types of business loans for a new entrepreneur in India, the ‘Loan for Woman’ category is one of the most recent ones that has gained immense popularity. There are many financial institutions today that have been running special schemes for business loans for women entrepreneurs. Currently, the Indian Government has multiple initiatives to encourage women in turning entrepreneurs and setting up small-medium sized businesses. The primary advantage of the special loan for women entrepreneurs includes the flexible amount of loan they receive, known as the ‘Start-up Loan.’ Moreover, they also receive discounts on the standard interest rates, and the process of them getting loan sanctions is even faster.
8. Invoice Financing
Commonly, invoice financing is also considered as invoice factoring or invoice discounting. This is a very typical kind of funding that is primarily meant for small businesses that face a time lag between the period when they raise invoices when they receive payment from the client. When these small businesses have to resort to the financial institutions to provide them the funds against the amount for the invoices they have raised, the lender can finance only up to 80% of the total invoice amount. Once the business receives the payment, it ends up clearing off the debts as per a tenure, which is decided to take into consideration the interest rate.
9. Overdraft
This is one of the most common types of loans amongst the different types of business loans available. The overdraft facility is provided against the collateral or security, especially in terms of the financial institution’s fixed deposit. In this case, the lender takes significant steps to analyse the borrower’s credit history, the relationship it has with the business, cash flow of the business, and checks whether there is any repayment history before finally approving the overdraft limit. The business can use the funds until the principal amount and interest are paid as per the term decided.
10. Business Credit Card
Although a business credit card does not come under the category of the first options for a business in selecting the finance mode, it is still an excellent option for immediate and short-term funding option. If the business owner needs cash instantly and simultaneously wants to earn the rewards against the payment, which is done on the debt, in this case, the option of a business credit card makes sense. Many financial institutions have been coming up with ways to attract customers by offering multiple benefits, for example – introductory cashback on insurance cover or spend protection. However, in the case of business credit cards, the interest rates could be higher than traditional loans.
Hence, it is always better to take a business loan that suits the business requirements. Those mentioned above ten different types of business loans will help you decide the type of business loan that will do your business.