Whether it is a big or small business, at a certain stage the need for additional funds to meet day-to-day business requirements is common. Usually, businesses at the initial stage and from a growth perspective look for funds. Various types of business loans are offered to cater Indian enterprises and business owner’s unique needs.
Let us discuss all the types of business loan that are offered by banks and financial institutions in India.
A working capital loan is used by business owners to overcome any kind of financial in the daily operation of the business. It can also be used to fulfill various business expansion services, boosting business cash flow, purchasing raw materials, addition in inventory/stock, paying salaries, hiring staff...etc.
Working capital loans are offered in the form of short-term loans in which the repayment tenure is up to 12 months. This type of loan is also known as a collateral-free loan that allows business owners to avail credit facility without pledging any collateral or security with the lending institutions.
As compared to long-term loans or other business loans, the interest rate are often slightly higher. Under this loan, the lending institution has set a limit that the amount can be utilized for specific business purposes only.
A Term loan is the most common type of business finance offered by lending institutions. These loans are required to be repaid in regular payment over a specified period.
Term loans is broadly categorized into 2 different categories named short-term and long-term loans. Typically, the tenure with this type of loan ranges between 1 to 5 years.
The repayment tenure of the short-term is up to 12 months while the long-term is up to 10 years. Under this type of facility, collateral-free business loans are offered up to Rs. 1 Crore and can be exceeded further based on business requirements.
However, the repayment tenure for a term loan is finalized by the lender at the time of loan application and is usually up to 5 years.
Invoice or Bill Discounting is a credit facility offered by various banks and financial institutions to businesses. At the peak of delay between raising invoices and receiving payments, Bill discounting comes into the picture by allowing businesses to get funds against invoices.
This allows the sellers to get an amount in advance at discounted rates. Buyers contribute in the form of interest rates and monthly fees to lending institutions for increasing the revenue.
For instance, Let’s take you have sold goods to Mr. Pratap Verma, In which Mr. Pratap has given a letter of credit through a financial institution for a period of 40 days. In case, If you want money earlier to the 40 days commitment. The financial institution will charge a certain interest rate from you which in return is called a discount for the seller.
Now, let’s assume if you were supposed to get Rs. 50 lakh from the bank on or after 40 days, by doing bill discounting the bank discount of Rs.50,000 you may now get Rs. 40,50,000 from the financial institution. However, the buyer will have to deposit Rs. 50 lakh to the concerned bank as committed on the 40th day.
A letter of credit (LC) is a kind of credit facility majorly used in trading businesses wherein the bank or financial institutions assist in providing bank guarantees to the enterprises that engage in domestic or international trade transactions.
A letter of credit can be used for both import and export purposes. Typically, enterprises doing business with overseas companies often are unknown suppliers; to ensure payment before performing any transaction, the letter of credit is availed by businesses as a payment assurance to the suppliers.
In case a buyer is unable to make payment on the purchase, the bank assures and takes the responsibility to cover the outstanding amount. Even, Banks ensure that payment will be received by the concerned party even if the opposite one fails to make the payment.
A machinery loan is also known as equipment financing that helps business owners in getting finance to purchase new machinery/equipment or upgrade the existing.
Equipment financing are majorly used by corporate enterprises and enterprises engaged in the manufacturing sector. Modern business tools are a great way to expand your business. You can also enjoy tax benefits associated with equipment finance or machinery loan.
With a machinery loan, you can increase your business production resulting in higher profit margins from the sale of products and distribution.
The Government of India has launched various business loan schemes to cater the requirements of business owners, MSMEs, women entrepreneurs and other entities engaged in trading, services and manufacturing sectors.
Most of the financial institutions such as public and private sector banks, Regional Rural Bank (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), and NBFCs provide loans under government schemes. Some of the popular Govt schemes include CGTMSE, Standup India, Startup India, Mudra Scheme under PMMY and PSB Loans in 59 minutes..etc.
An overdraft facility is one of the most preferred credit facility by borrowers. Overdraft facility is a unique funding product offered by banks to its account holder to withdraw cash from his/her account even if the account balance is zero.
Based on the borrower’s credit history, business cash flow, relationship with lending institutions and previous repayment history the lender decides the credit limit to sanction.
The borrower can withdraw the required amount and pay interest only on the utilized amount. However, the overdraft facility is offered against collateral/securities, especially in terms of FDs with the lending institution.
As the term refers, A startup loan is provided to cover the expenses required when setting up a new business venture. Borrowers of such loans may not have a great credit history in their company due to a lack of business vintage.
Therefore, to judge the business loan eligibility, the lender would consider the personal credit profile of the borrower. The projected turnover and other financials are taken into consideration to decide the loan amount, repayment tenure and applicable interest rates.
The business should be established for a certain period and able to submit proof of registration and existence before a startup loan is sanctioned.
A loan against property is a perfect solution to meet business needs. As the name suggests, this loan is offered against the property as security. The loan can be availed by providing any type of property; be it a residential or commercial property.
The repayment tenure is given up to 20 years. Lenders often fund between 70% - 85% of the property value as a maximum loan amount. Make sure that the property is free from any kind of legal litigation.
The merchant cash advance is a type of business finance specially designed for small businesses that accept credit and debit cards payment from customers.
A business owner can easily access cash as soon as the lender provides a cash advance for the company which it repays as a percentage of its customer card paying using a card terminal.
The best part of merchant cash advance is that the individual needs to pay as per daily sales. So, if a business is doing well, one can repay more while on the other hand if the business is slow, the amount of return is also low. To avail such facility, the business must ensure to have sufficient cash flow to service the repayments.
It is always advisable to check your eligibility before applying for a business loan or any other type of business loan. This will make you aware of the chances of loan approval or rejection. Eligibility criteria shall vary from bank to bank. Some of the common eligibility defined by banks and financial institutions are given below:
|Eligibility Criteria for Business Loan|
|Age Criteria||Minimum 21 to max 65 years|
|Eligible Entities||Business owners, SMEs, MSMEs, Proprietorship Firm, Sole Proprietorship, Private and Public Limited Companies, Limited Liability Partnerships, Retailers and Businesses engaged in Manufacturing, Trading and Service Sectors|
|Business Vintage||At least 1 year of business vintage that must be in profit|
|Business Experience||Minimum 3 years of business existence in the same field|
|Credit Score||The credit score should be 750 or above|
|Annual Turnover||Minimum Rs.12 lakh per annum and above for existing enterprises|
|Nationality & Status||The applicant must be a Resident of India and should not have defaulted on any previous loans with any lender|
|Additional Criteria||Applicant must own either property, office, godown or shop|
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However, the need for funds in a business can arise at any uncertain point. To meet any kind of specific requirements, you can opt from a variety of business loans offered by banks and financial institutions.
It’s recommended that before applying for business loan, you should understand your requirements well enough to pick an appropriate business credit solution from the above given different types of business loans depending on the nature of the business and specifications.
Financeseva helps you to avail the most suitable type of business loan in India that fulfills your needs. Get unsecured business loans or collateral-free loans for small businesses up to Rs.50 lakhs with a flexible repayment schedule ranging from 12 – 60 months. For above 50 lakh requirements opt for secured business loans that offer loans up to 5 Crores.
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