Types of Business Loans Offered in India | Get Details about the Various Types of Business Loans in India, Eligibility and Benefits | Application Process for Different Types of Business Loans in India
Small or large businesses alike frequently want more funding to cover ongoing expenses. The type of firm, its capital intensity, and its stage of development—from start-up to growth to maturity—all affect the amount of investment needed. Typically, a company’s earliest phases and future growth require the most funding. We will cover practically all of the Types of Business Loans that Indian financial institutions will approve in this article.
Table of Contents
Types of Business Loans in India:
- Working Capital Loan
- Term Loan (Short & Long-term Loan)
- Letter of Credit
- Bill/Invoice Discounting
- Overdraft Facility
- Equipment Finance or Machinery Loan
- Loans under Govt. schemes
- POS Loans or Merchant Cash Advance
Working Capital Loan
Businesses employ working capital loans to cover their everyday expenses as well as for a variety of business expansion services, boosting business cash flow, buying raw materials, adding to their inventory or stock, paying salaries, hiring personnel, etc. Working capital loans are often short-term loans with up to a 12-month repayment period. This loan is also known as a collateral-free loan because the borrower is not required to provide the bank with any security or collateral. In contrast to long-term loans or other types of company loans, the interest rate given is a little higher. In this sort of loan, the bank specifies a maximum amount that can be borrowed by the firm and restricts its use to those purposes.
Benefits and Drawbacks of Working Capital Loan
Some working capital loans include eligibility criteria that are simpler to meet. (However, SBA loans don’t typically work like that.) The cost of the loan will be influenced by your creditworthiness, the type of loan, and other considerations. You can be eligible for funding even if your FICO score is below 600. However, lenders might present you with less favourable loan terms.
A term loan is one that has a predetermined repayment schedule that must be followed. There are two types of term loans: short-term loans and long-term loans. These two varieties have repayment terms ranging from 12 months to 5 years. Short-term loans have a tenure of no longer than one year, whereas long-term loans have a term of up to ten years. Up to Rs. 1 crore in collateral-free business loans are available, though they may go higher depending on the needs of the organisation. When a loan application is submitted, the lender determines the duration of repayment for a term loan, which is often up to 5 years.
Benefits and Drawbacks of Term Loan
You might be able to obtain a term loan with a competitive interest rate if you have good personal and company credit scores, particularly from a traditional lender. Additionally, term loan application and funding times are frequently quicker with internet lenders. On the downside, this sort of finance may require you to provide collateral and/or a personal guarantee, which is a legal commitment you make to repay the loan with your personal funds if the firm is unable to do so.
Letter of Credit
A letter of credit is a sort of credit limit that is mostly utilised by trading companies when the bank or lender gives financial guarantees to businesses engaged in international commerce. Entrepreneurs can use letters of credit for both import and export transactions. Businesses operating internationally frequently work with unidentified suppliers; as a result, they need payment assurance before completing every transaction. A letter of credit is therefore essential for giving suppliers payment certainty.
Bill or invoice discounting is a funding option where the lender gives the seller money up front at a reduced rate. This requires customers to contribute in the form of interest rate, the form of interest paid and the monthly fee in order to increase the revenue of the financial institutions.
For instance, if you sold Mr Singh some products and he gave you a letter of credit from a bank for 45 days, the bank would charge you interest if you wanted to receive your money before 45 days, which would be considered a discount for the seller.
Let’s further assume that if the amount you were meant to get was Rs. 10 lakh on or after 45 days, you would now receive Rs. 9,50,000 in return from the bank due to the bank’s discount or interest rate of Rs. 50,000. Anyhow, on the 45th day alone, the buyer would deposit Rs. 10 lakh with the appropriate bank.
A bank’s overdraft facility allows an account holder to take money from their account even if there is no money in it. Only the amount of the sanctioned limit that has been used is subject to interest charges, which are assessed daily.
The sanctioned credit limit is determined by the account holder’s history with the bank, including their relationship, credit history, cash flow, and, if applicable, payback history. The overdraft limit is adjusted annually and is flexible as long as the interest is paid on time. When it comes to bank FDs, an overdraft facility is provided against securities or collateral.
Equipment Finance or Machinery Loan
The equipment finance or machinery loan is a funding choice made available to the borrowers so they can upgrade or buy new equipment or machinery. Large businesses and those in the manufacturing industry are the most common users of equipment finance. Businesses or business owners that borrow money for machinery or equipment also gain tax-wise. Each lender will provide a different interest rate, loan size, and repayment period.
Equipment Finance or Machinery Loan Advantages and Disadvantages
Your credit history may have a significant impact on your company’s ability to obtain equipment financing. You have a higher chance of being approved and can be eligible for lower interest rates if you have good credit. Meanwhile, a barrier that can make it challenging to acquire a reasonable equipment loan offer is bad credit.
Loans under Govt. Schemes
The Indian government has launched a number of loan programmes to support people, MSMEs, women business owners, and other organisations operating in the manufacturing, service, and trade sectors. Various financial organisations, including commercial and public sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), etc., give loans through government programmes. The Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, and other popular government loan programmes are just a few examples.
Point-of-Sale (POS) Loans
A business owner operating an operation pays a lump sum payment in advance to suppliers through his or her daily or upcoming credit or debit card transactions through a process known as POS Loans or Merchant Cash Advance. Small business owners frequently run into short-term liquidity problems. Therefore, retailers choose POS loans to lessen the business’s financial crisis. In comparison to other business loan options, the interest rate offered by POS loans is somewhat greater. The payback facility is connected to Point of Sales (POS) terminals for debit or credit transactions that are found at retail outlets, grocers, supermarkets, and shopping centres.
You must have a general understanding of the different business loan programmes that lending organisations in India offer by this point. Business loans are available with flexible and simple EMIs at low, appealing interest rates. Comparing different loan offers from top private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Micro Finance Organizations (MFIs), and other banking and financial institutions can help you choose the best business loan package.