A loan designed for businesses in India is called a business loan. Business owners nowadays have multiple options to choose from. These options vary in their requirements, repayment duration, interest rates, funding period, and terms and conditions. Each type of loan is curated to serve different purposes like financing needed for equipment, working capital, inventory, real estate, etc.
So before you approach a loan lender, you must comprehend completely the choices available and nature and small and easy business loans befitting your business needs. Here’s a look at the various kinds available for you:
This is the most basic type of business loan and is ideal for entrepreneurs with an excellent credit record. Businesses owners in need of huge sums of money to expand their business can also avail a term loan. So, if you are looking to start your new business, you might want to skip this.
Even though the ushering of a multitude of lending options available in the market have provided small business owners with reasonable alternatives, they are yet to become a popular choice because of the most uncomplicated fact that the cheapest loans are still available at a bank. But banks have a low approval rate and most often do not provide small capital loans, not to forget the tedious application process. If you can endure the wait, terms loans are the most affordable sources of business loans available.
Line of Credit
This type of loan is suitable for business owners with strong credit and looking for a backup option to mitigate the adverse effects of fluctuations in cash flow. With this loan, you will have access to a pool of funds from where you can borrow funds as per your requirements rather than getting all the money at once. It will have a margin on the funds that you can lend at a fee, but you won’t be charged anything unless you withdraw. This can be of two types — fixed and revolving. For the latter, once you withdraw and gradually repay what you withdrew in due time, your line of credit is reset to its original amount.
Banks provide both secured and unsecured credit lines. This provides the sought after flexibility that term loans cannot. However, a line of credit loan is as difficult to qualify as a term loan.
Equipment loans are the financing you need to buy machinery, vehicle, or equipment for the smooth and unhindered operations of the business. It is the monetary assistance that allows business owners to pay for pieces of equipment purchased over a predetermined duration. The amount you can apply for via an equipment loan varies with the type of business and equipment involved. Also, the interest rate you get is determined primarily by your credit score.
The anticipated duration decides the repayment period for your loan for the equipment to retain its value. If you become a defaulter, the equipment is seized right away. Hence, the collateral for an equipment loan is the equipment itself, i.e., you can get a loan without paying money upfront.
Purchase Order Loans
This type is ideal for a start-up and small business owners. This type of loan is applicable when you have a large purchase order but not the means to sponsor for it. A purchase order lender takes care of the funds involved in delivering your order while you provide your end of the labour. When the client pays for your service, it goes directly to your lender who deducts the loan amount along with interest and returns you back your rightful share of the bill. It is best for service-oriented companies. The collateral for this loan is the purchase order, i.e. it is self-secured.
Personal loans are another type of a loan ideal for start-ups but it requires good personal credit. Although it does not count as a business loan, it is often used for investing in a business. It is entirely based on your finances and credit report. The stronger your credit, the more confident a lender is about your likelihood of repaying your debts. You can even bargain for a lower interest rate on your loan if you have a sound credit score to second your credibility.
Working Capital Loans
Companies use these for funding the day to day expenses. These are primarily short-term loans and come in variable amounts based on your business.
These include guaranteed loans, commercial loans, mortgage loans, medium and short-term loans, invoice financing, among others.
Besides, if you are a registered MSME, you can also avail a MUDRA loan. It is a government loan scheme to help MSMEs grow and flourish.
Time is of the massive essence in the business world. Careful analysis of your business needs and after that, applying for the right business loan can save you precious time and channelise your efforts in the right direction.