Business, be it big or small, is most of the time in need of additional funds to meet day-to-day business requirements. The required funding also depends upon the nature of the business – is it capital-intensive and what is its stage of development, in terms of inception, growth, or maturity? Usually, businesses need funds the most in the initial stages and for growth perspectives. In this piece of article, we shall discuss almost all the types of business loans that are sanctioned by financial institutions in India.
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Broadly there are 8 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
1) Working Capital Loan
Working capital loans are used by enterprises to meet their daily business requirements and for various business expansion services, enhancing business cash flow, purchasing raw materials, addition in inventory/stock, paying salaries, hiring staff, etc. Working capital loans are majorly short-term loans in which the repayment tenure is up to 12 months. This loan is also termed a collateral-free loan in which the borrower is not required to submit any collateral or security with the bank. The interest rate offered is a bit higher, as compared to long-term loans or general business loans. In this type of loan, the bank sets a limit for the business to take a loan and the amount can be utilized for specific business purposes, only.
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2) Term Loan
Term loan is a loan that is required to be repaid in regular payments over a set period of time. The term loan is categorized into short-term and long-term loans. The repayment tenure of these two types ranges between 12 months to 5 years. Term loans that are of a shorter duration which is of 12 months are called short-term loans and loans up to 10 years are long-term loans. The collateral-free business loans are offered up to Rs. 1 crore, also can exceed depending upon business requirements. 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) Letter of Credit
Letter of credit is a type of credit limit used majorly in trading businesses in which the bank or lender provides funding guarantee to enterprises that deal in international trade. Letter of credit can be utilized for both import and export purposes by entrepreneurs. Enterprises doing businesses overseas tend to deal with unknown suppliers, so for that, they require assurance of payment before performing any transaction. Therefore, a letter of credit plays a vital role in providing payment assurance to the suppliers.
4) Bill Discounting
Bill or Invoice Discounting is a funding facility in which the seller gets an amount in advance at discounted rates from the lender. This asks buyers to contribute in the form of interest rate in increasing the revenue of the financial institutions, in form of interest paid and from the monthly fee.
For example, You have sold goods to Mr. Singh, he has given you a letter of credit from the bank for 45 days, if you want to get money from the bank before 45 days, the bank will charge some interest rate from you, which in return will be called a discount for the seller. Further, let’s assume if the amount which you were supposed to get was Rs. 10 lakh on or after 45 days, by bank’s discount or interest rate of Rs. 50,000 you now get Rs. 9,50,000 in return from the bank. The buyer will anyhow deposit Rs. 10 lakh to the respective bank on the 45th day only.
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5) Overdraft Facility
Overdraft facility is a funding type offered by a bank to its account holder to withdraw cash from his/her account even if the account balance is zero. The interest rate is charged only on the utilized amount from the sanctioned limit and on a daily basis. The credit limit that is sanctioned depends upon the account holder’s relationship with the bank, credit history, cash flows, and repayment history if any. The overdraft limit is revised every year and can be used in any manner if the interest is paid on time. An overdraft facility is offered against collateral/securities, especially in terms of FDs with the bank.
6) Equipment Finance or Machinery Loan
The equipment finance or machinery loan is a funding option offered to the borrowers for them to purchase new equipment/machinery or to upgrade the existing. Equipment finance is used mainly by large enterprises and enterprises engaged in the manufacturing sector. Enterprises or business owners availing equipment finance or machinery loan also enjoy tax benefits. The interest rate, loan amount, and repayment tenure offered shall vary from lender to lender.
7) Loans under Govt. Schemes
The Government of India has initiated various loan schemes to promote individuals, MSMEs, women entrepreneurs, and other entities engaged in trading, services, and manufacturing sectors. The loans under government schemes are offered by various financial institutions, such as private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), etc. Some of the leading Govt. Loan schemes include Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, etc.
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8) Point-of-Sale (POS) Loans
POS Loans or Merchant Cash Advance is a mechanism in which a business owner running an enterprise pays a lump sum amount in advance to suppliers through his/her daily or future credit or debit card transactions. Several times, merchants of SMEs experience a short-term cash crunch. Hence, to reduce the liquidity crunch in the business, merchants opt for POS loans. The interest rate offered under POS loans is comparatively higher, as compared to other business loan types. The repayment facility is linked with debit or credit transactions Point of Sales (POS) machines installed at retail shops, grocery stores, supermarkets, and shopping malls.
As of now, you must have got a rough idea about the types of business loans offered by lending institutions in India. Business loans can be availed at nominal and attractive interest rates with flexible and easy EMIs. The best business loan deal can be picked by comparing various loan deals offered by leading private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Micro Finance Institutions (MFIs), and various other banking and financial institutions.