Starting a business is not easy as it needs you to develop a robust business plan, hire a skilled workforce, manage operations, ensure compliance, secure funds, etc. While all seem challenging, the most critical is obtaining financial support. A business loan is one of the best ways to get money to fund your business. Here, we understand different types of business loans and help you select a suitable one.
Types of Business Loans in India
Following are some of the best business loans available:
1. Term Loans
A term loan is the most popular of the lot. Many lenders like banks and financial institutions in the country offer this type of loan to entrepreneurs. To apply for a term loan, the borrowers can take a loan of a specific amount at a certain interest and for a definite period.
2. Working Capital Loan
Working capital loans fulfill daily business needs and can be used for different purposes like improving cash flow, buying raw materials, maintaining stock, paying salaries, etc. As the name suggests, it is a loan taken for a short term to manage temporary working capital. The credit amount depends on your credit limit, which the lender specifies. If you think the interest rate applies to the entire credit amount sanctioned, then it is not. You need to pay interest for only the amount you use.
3. Letter of Credit
A Letter of Credit is most appropriate for overseas trades. A lender pays the vendors or exporters in this type of loan. This business loan lowers the default risk by keeping firm rules for the company and its suppliers in the transaction.
4. Overdraft
A business loan that can be taken to fulfill your short-term needs is an overdraft business loan. The businesses can withdraw funds from an overdraft account to meet any business requirement. Many lenders offer overdraft facilities, but the applicant must furnish collateral. Also, there is a capping on the overdraft amount, too. The lender predetermines this limit.
Just like cash credit, the interest is applicable only on the sum used in the overdraft business loan.
5. Gold Loan
Gold Loan is also a secured loan, where the borrower submits gold ornaments or bullion as collateral. This type of business loan is more popular with small business owners—the best features of this loan are fast processing, low paperwork needs, accessibility, etc.
6. Machinery Loan
A machinery loan permits the borrowers to purchase equipment/machinery. The loan amount can also be used to upgrade the existing machinery.
7. BLAP or Business Loan Against Property
A Business Loan against Property, also called BLAP, offers you a specific loan amount in return for collateral. In this secured loan, you can borrow funds by submitting residential property papers. Like all secured loans, the interest rate for BLAP is low and offers a longer repayment loan term. If you want to expand your business or consider debt consolidation, you can use this loan.
8. Invoice Factoring
Factoring is a method of business loan where the lender buys the businesses’ accounts receivable or invoices as a factoring company. Most often, the lender is the factor company that provides funds to the businesses, according to the invoice amounts. The factor then collects the payment from the company clients. The businesses get money to maintain cash flow, and the lenders get interest.
9. Project Loans
If you want funds to manage a large-scale project, go for a project loan. This is a long-term secured loan that can be taken for business development, buying assets or real estate, setting up manufacturing plants, land acquisition, improving infrastructure or construction, etc. This loan allows longer repayment terms.
10. Unsecured Business Loan
Unsecured business loans are also available, though at a higher interest rate. As the name says, you don’t have to provide any collateral as security for availing this loan. The lenders check your creditworthiness and business financial standing to approve the loan. The businesses with fewer assets and urgent funding needs can take the unsecured borrowing but pay a higher interest rate.
Which Business Loan is Right For You?
Now that you know the different types of loans, which one do you think is the best for you? Well, it will depend on your business goals and specific financial needs. To choose the best loan:
- Identify your business needs like managing cash flow, buying new equipment, business expansion, etc.
- Understand whether you can afford to take a secured or unsecured loan. Find out different interest rates, loan terms, and other applicable fees.
- Ensure to explore loan flexibility options, especially when your business income is seasonal. For example, a line of credit provides more flexibility than other loans. It allows you to manage funds during unexpected times.
- Assess your business’s financial status, credit score, revenue, bank statements, etc.
After considering all these factors, select the right business loan and have a thriving business.
Wrapping Up
There are a types of business loans, while some can be customized according to your specific business needs. Explore and find out competitive business loan options that offer flexible repayment options to empower your business!
FAQs
1. What are the different business loans?
Ans. The different types of business loans include term loans, machinery loans, lines of credit, cash credit, gold loans, unsecured loans, etc.
2. Are term loans short or long-term?
Ans. Term Loans can also be divided into different types according to the loan tenure. There is a short-term business loan that allows a period of 12 months. Long-term loans can be taken that offer a more relaxed loan period of five years.
3. How can I use a term business loan? Does it need collateral?
Ans. You can take term loans for fulfilling various purposes like buying equipment, expanding your business, launching a new product, etc. Most term loans need you to deposit collateral, and as a result, the interest rates on this type of loan are low.
4. How to take a Business Loan Against a Property loan?
Ans. To take this loan, you should deposit property papers as collateral. Some banks also offer this loan by allowing the borrower to pledge assets like stocks and bonds.