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Types of Business Loans

  • 01-Jun-2022
10 Best Types of Business Loans in India - Financeseva.com

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. 


10 Different Types of Business Loan in India 

  • Working Capital Loan
  • Term Loan (Short Term & Long Term)
  • Bill/Invoice Discounting
  • Letter of Credit
  • Machinery Loan
  • Loans under Govt Schemes
  • Overdraft Facility
  • Startup Loan
  • Loan Against Property
  • Merchant Advance Cash


1. Working Capital Loan 

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. 


2. Term Loan (Short Term & Long Term) 

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. 


3. Bill/Invoice Discounting 

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.  


4. Letter of Credit 

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.  


5. Machinery Loan 

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. 


6. Loans under Govt Schemes 

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. 


7. Overdraft Facility 

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. 


8. Startup Loan 

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.  


9. Loan Against Property 

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.  


10. Cash Advance for Merchants 

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. 

Also Read: 5 funding options to raise capital for your start-up business 


Check your Eligibility 

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 


Documents Required 

  • Duly filled application form with Passport-sized Photographs
  • Identity proof and address proof of both applicant and business such as Aadhar Card, Voter’s ID, PAN Card, Driving License, Utility Bills (Latest Electricity Bill or Water Bills)
  • Business Incorporation Certificate, MOA, AOA, GST Certificate, GST Certificate, ITR with computation
  • Company or Business PAN Card
  • Last 6 months bank statement
  • Income proof of business
  • Any other document required by the bank or NBFC


Why Apply for a Business Loan at Financeseva.com 



Offers from Top Lenders: Financeseva has partnered with more than 130 banks and NBFCs to provide the best available loan offers from various lending institutions at one marketplace. 

Compare & Choose: On Financeseva, you can easily check and compare business loan offers from all leading banks, NBFCs and Financial institutions with just one click of a button. 

Personalized solutions & Approval Surety: With our personalized parameters, you can select the filter from the dropdown and check the most-suited offers based on your selection to increase the chances of loan approval.   

Pre-Approved Loans: Once a part of the Financeseva ecosystem, you get personalized pre-approved business loan offers based on your credit health from time to time.  

Free Loan Consultancy: In case you have any specific queries or assistance, our team of experts will guide you and help you to have a hassle-free process. 

Complete Digital Process: Financeseva.com offers you a completely digital process that allows you to avail loan from the comfort of your home with minimum documentation and enjoy a digital experience starting from application to disbursement.  

End-to-end Assistance: Right from the initial stage of loan option to loan amount crediting in your bank account, our team will be with you and each step and coordinate with the lender on behalf of you to give a seamless experience. 



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. 

Financeseva has customized its dashboard especially to cater the requirements of MSMEs. It offers customized loans to micro, small and medium enterprises- being a one-stop financial solution point for MSMEs and Corporate businesses.  

Also Read: How to Get a Startup Business Loan without Collateral?

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