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Types of Business Loans

Business owners who don't avail loans from a bank might think they have run out of options. That is not true because in the market today there are various types of business loans available. As a business owner, you must first need to enhance your knowledge about them properly before initiating the process of searching for the best business loan.

Following are the common types of business loans that are available for entrepreneurs in India.

Term Loan

Term loans are the most common types of business loans and in nature, they can be secured or unsecured. The loan amount available to the borrower depends on its business’s credit history. The tenure is fixed, for unsecured it ranges between 1 and 5 years or around 15 - 20 years for secured business loans. Term loans are taken for specific purposes, generally for capital expenditure. Lenders disburse the approved funds in a lump sum amount. 

Start-up Loan

Start-up loans are given for new business ventures. The applicants for these loans don't need to have a great credit history on their company due to a lack of business year. Thus, while judging on the business loan eligibility, lenders will glance the borrower’s personal credit profile and company profile. The other factors such as current turnover figures and other financials are also examined when deciding the loan amount, tenure, and interest rate applicable. To obtain these loans, the business has to be established, and applicants have to submit proof of the business existence and registration.

Working Capital Loan

A working capital loan is a type of small business loan obtained to overcome the shortage of cash for operating a business on daily basis. These loans generate a balance in cash flows and are helpful to deal with a shortfall of cash during off-seasons or meet the demands during a peak season. To understand the monthly instalment, do take the help of Fintra's loan EMI calculator.

Invoice Financing

Invoice financing, known as invoice discounting or invoice factoring, is a type of funding especially done for small businesses when encountering time lags between raising invoices and receiving payment from the clients. Financial institutions provide the funds against the amount raised in the invoice. Lenders may finance up to 80% of the invoice amount. When the business receives the payment, it clears off the debts as per the decided tenure and interest rate.

Equipment Financing

Generally, it's the manufacturing businesses that opt for equipment financing or machinery loan. Since manufacturing units require expensive equipment for conducting their business, to purchase the machines, equipment financing is the most preferred one out of all the types of business loans. This is because in nature machinery loans are specific, whereas the equipment is taken as collateral along with other security. For these loans, interest rates can be lower than those charged on term deposits. 

Business Loan for Women

In India, some banks or financial institutions have developed special schemes on business loans for women entrepreneurs. The government of India also has created initiatives to encourage women in establishing small to medium-sized businesses. Some advantages of specialized loans for women entrepreneurs are a start-up loan, flexible loan amount, discount on the standard interest rates, and a quicker loan process. 

Overdraft

In terms of fixed deposits with the banks or financial institutions, overdraft facilities are provided against securities or collaterals. Lenders analyze the borrower’s credit history, relationship with the bank/institution, business cash flows, and the repayment history before passing a certain fixed overdraft limit. Borrowers can withdraw an amount required, and pay interest only on the amount they've utilized. Borrowers can continue using the funds in this manner as long as the principal and the interest amount is repaid on the decided term.

Merchant Cash Advance

In this facility, banks or financial institutions provide an advance of capital on a portion of daily debit card sales or credit. Then, the borrower has to reimburse the advance with a portion of the daily credit sales. However, borrowers must ensure that they've enough cash flow to manage the payments. The vital advantage of merchant cash advance is that the individual has to only pay as per the daily sales. Thus, when the business is going slow, the amount to be returned is also lowered, and when the business is doing well, the individual can repay more.

Business Credit Card

Although business credit cards aren't the very first option business owners may opt for to finance their needs, it is still a good tool for a short-term and immediate funding option. When a business owner requires instant cash and desires to earn rewards against payments made on the debt, the business credit cards is the right choice. Numerous banks and financial institutions attract clients to this type of funding by providing benefits like introductory cash-back on spends protection/insurance cover, etc. However, in this type of facility rates might be higher as compared to traditional business loans.

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