8 Types of Business Loans in India In order to meet their daily needs, businesses of all sizes frequently require more funding. The amount of money needed also relies on the type of business: is it capital-intensive, and what stage of development—inception, growth, or maturity—is it at? Businesses typically require the greatest funding during their early phases and for expansion plans. Almost every kind of company loan approved by Indian financial institutions will be covered in this article.
Broadly 8 Types of Business Loans in India
- Working Capital Loan
- Term Loan
- Letter of Credit
- Bills/Invoices Discounting
- Overdrafts Facility
- Equipment Finance or Machineries Loan
- Loan under Government schemes
- POS Loan or Merchant Cash Advance
8 Types of Business Loans in India
1. Working Capital Loan
8 Types of Business Loans in India Working capital loans are utilized by individuals, entrepreneurs, startups, and MSMEs to fulfill their daily business needs and for various business growth services, improving business cash flow, acquiring raw materials, adding to inventory/stock, paying salaries, hiring personnel, etc. Working capital loans are primarily short-term loans with a loan amount of up to Rs. 40 lakh where the repayment period is up to 12 months or may be extended based on business needs. The interest rates provided by Banks/NBFCs are somewhat higher in comparison to long-term loans or standard business loans. In this kind of loan, the lender establishes a limit for the business to borrow, and the funds can be used solely for designated business purposes.
2. Term Loan
8 Types of Business Loans in India A term loan is one that must be paid back over a predetermined length of time in regular installments. There are three types of term loans: short-, intermediate-, and long-term. These two varieties have repayment terms ranging from 12 months to 5 years. Short-term loans are those with a tenure of less than 12 months, whereas long-term loans are those with a duration of five years or more. The maximum amount of the collateral-free business loans is Rs. 2 crore, though it may be higher based on the needs of the company. At the time of loan application, the lender determines the repayment period for a term loan.
3. Letter of Credit
8 Types of Business Loans in India A sort of credit limit known as a letter of credit is primarily utilized in trading businesses, where banks or lenders provide funding guarantees to businesses engaged in international commerce. Business owners can use letters of credit for both import and export. Businesses operating abroad frequently work with unidentified suppliers, therefore they need payment assurance before completing any transactions. As a result, a letter of credit is essential for giving suppliers payment assurance.
4. Bill Discounting
8 Types of Business Loans in India A finance arrangement known as “bill or invoice discounting” allows the seller to receive a sum in advance from the lender at a reduced rate. In order to increase the financial institutions’ revenue, this demands buyers to participate in the form of interest rates, monthly fees, and interest paid.
8 Types of Business Loans in India For instance, you sold items to Mr. Singh, and he gave you a 45-day letter of credit from the bank. If you wish to get your money before then, the bank will charge you interest, which the seller will consider a discount. Furthermore, assuming that the amount you were meant to receive was Rs. 10 lakh on or after 45 days, you now receive Rs. 9,50,000 from the bank due to a Rs. 50,000 discount or interest rate. In any case, on the 45th day only, the buyer will deposit Rs. 10 lakh to the appropriate bank.
5. Overdraft Facility
8 Types of Business Loans in India A bank may provide its customers with an overdraft facility, which allows them to take money out of their account even when there is no money in it. Only the amount used from the authorized limit is subject to the interest rate, which is assessed daily. The approved credit limit is determined by the account holder’s cash flows, credit history, repayment history, and connection with the bank. If interest is paid on time, the overdraft limit, which is updated annually, can be utilized anyway you choose. The bank offers an overdraft facility secured by securities or collateral, particularly bank-issued FDs.
6. Equipment Finance or Machinery Loan
8 Types of Business Loans in India Borrowers can use the equipment finance or machinery loan as a source of funding to update their current machinery or buy new equipment. Large businesses and those in the manufacturing industry are the primary users of equipment finance. Businesses or entrepreneurs who take out loans for machinery or equipment financing also benefit from tax advantages. Each lender will provide a different interest rate, loan amount, and repayment period.
7 Loans under Govt. Schemes
8 Types of Business Loans in India For individuals, MSMEs, women entrepreneurs, and other organizations involved in the commerce, service, and manufacturing sectors, the Indian government has launched a number of credit programs. Numerous financial organizations, including Public and Private Sector Banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance organizations (MFIs), Small Finance Banks (SFBs), and others, provide loans under government programs. The Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 Minutes, PMRY, and others are some of the top government loan programs.
8. Point-of-Sale (POS) Loans
8 Types of Business Loans in India Through POS Loans, also known as Merchant Cash Advance, a business owner can use his or her daily or future credit or debit card transactions to pay suppliers a lump sum payment in advance. Merchants of SMEs frequently have a temporary cash crunch. Therefore, merchants choose POS loans to alleviate the business’s liquidity constraint. Comparatively speaking, POS loans have a higher interest rate than other kinds of business loans. Retail outlets, supermarkets, grocery stores, and shopping malls all have Point of Sale (POS) terminals that are connected to the payback facility through debit or credit transactions.
8 Types of Business Loans in India You probably have a general understanding of the kinds of business loans that Indian lending institutions provide at this point. Business loans with flexible and simple EMIs are available at reasonable and alluring interest rates. Comparing different loan offers from top public and private sector banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Micro Finance organizations (MFIs), and other banking and financial organizations can help you choose the best business loan offer.
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