Most businesses avail loans to help with certain financial aspects of the business. Business loans are sanctioned to businesses of different sizes with a set of particular terms and conditions depending on the purpose of the loan.
Types of Business Loan In India
Let us take a look at the different types of business loans in India.
Meant for new business ventures, these loans are availed to help fund requirements of new business. The credit history of the borrower is important in this type of application along with the credit history of the business.
For some financial organizations, the business also needs to be of six months to one-year-old for Start-up Loans to be sanctioned.
Financial records and statements of the business in the months before applying for the loan, need to be submitted to the bank of the financial company before processing can start. These details also help in determining the loan amount, interest rates, tenure, and other terms.
These are the types of business loans that a business avails to overcome a periodical shortage of cash. When the working capital sanctioned at the beginning of the financial year for a business falls short of covering certain expenses, Working Capital loans are availed. This type of loan also helps in covering any sort of expense that may have come up unexpectedly.
These loans are usually short-term loans and may or may not require collateral or guarantee. Most modern financial services sanction these loans without collateral. The interest rates on these loans are not high but can go up with a delay in repayment.
High value, long-term business loans that are availed to usually be a part of capital expenditure. These loans have a fixed tenure which can range between five to twenty years. Term Loans that are secured (has collateral or guarantee in the form of assets) have longer tenures than unsecured (no requirement of collateral or guarantee) term loans.
The interest rate on these loans is usually in the lower range. But the interest can either be fixed or variable with each year until the loan is paid back.
The credit history of the company plays a very crucial deciding factor in the sanctioning of these loans by the financial institution.
As the name explains, these loans are used to buy machinery for businesses. These loans are usually popular with manufacturing companies. IT and other office equipment can be financed by these loans as well.
Equipment Financing loans are specifically modelled for the purpose and take the pieces of equipment being purchased as the collateral to the loan.
Sometimes, financial organizations may ask for additional security as well. The tenure of these loans is 4 to 5 years. The interest rates charged are lower than Term Loans.
Some banks have provisions of Equipment Financing loan products with loan amounts going as high as 100 crores.
This type of funding is used to make up the delay in payments by a client to a business. Usually, there is a certain amount of time between when a business raises an invoice and when it gets paid. These loans can be availed from banks against the invoice raised.
80% of the amount of the invoice is sanctioned as the loan. The lender does deduct a processing fee and interest when the business pays the money back on payment by the client. These additional charges are extremely low compared to other types of business loans.
Invoice Financing which is also known as Invoice Factoring or Invoice Discounting is greatly beneficial for small businesses where cash flow may not be always stable.
BUSINESS LOAN AGAINST PROPERTY
A type of business loan wherein a property owned by the borrower has to be put up as collateral. The sanctioned amount that these loans allow is usually 70% of the market value of the property. The properties put up as mortgage needs to be free from any legal issues for it to be considered as valid.
The duration of these loans can be up to 15 to 20 years. The interest rates and repayment terms and conditions are decided on the purpose of the loan and the condition of the property.
Also known as a cash credit facility, a lender can sanction a certain overdraft amount against a fixed deposit that a borrower has with the lending organization. The borrower can use only the amount required and pay interest of the amount used.
The credit history, relationship with the financial organization, or bank, business cash flow of the borrower is considered before issuing an overdraft. The interest of repayment is decided on the tenure of the loan. The amount of money can be utilized in any manner for the business.
BUSINESS CREDIT CARD
A relatively new type of business loan, which provides the borrower with short term but immediate funding. These are the loans that financial institutions use to attract more people to easily avail of a loan by assuring certain rewards or cashback on repayment or even on availing the money.
These, however, are high-interest loans. But if the cash flow of a company is stable and the loan is only for a very short duration, Business Credit Card can be a good option.
LETTER OF CREDIT
A monetary guarantee that a bank provides to the seller or business assuring payment on goods on time, even if the buyer delays payments. This is popularly used in the export/import business where transactions are across countries.
The credentials and credit history of the buyer are considered before a bank provides a Letter of Credit. Guidelines for any form of Letter of Credit are issued by the International Chamber of Commerce. This type of business loan is similar to invoice financing, except the repayment is by the buyer or the client.
MERCHANT CASH ADVANCE
Cash advance issued against the credit card sales collected in the merchant account of a business. The bank or financial institution checks daily credit card receipts to determine whether the advance can be provided to the business on the grounds of how assured the repayment scheme is.
Rates on these advances are much higher than any other type of business loan. The disbursement of these loans is fairly quick and can take as less as 24 hours.
Most banks and financial organizations assist businesses to avail the best possible loans for them under all the terms and conditions prevalent.