Whether you have a start-up or an established enterprise, the need for funds can expand at any point in time of the business. It is necessary for a business to meet the day-to-day tasks and to have a smooth flow of work; to do this, the business owner can apply for a loan that caters to all the needs of the organisation or venture.
There are several types of loans for business owners that they can avail of to grow their businesses. Choosing the right type of loan that aligns with your business goals requires a thorough understanding of the various forms of business loans. For instance, one can consider a loan against property, a term loan, or a working capital loan to get the required funds for his/her business. Let’s look at the different loans, and what they offer so you have a clear understanding of which one conforms to the goals of your business venture.
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Types of Loans for Business Owners
The types of loans for business owners can be broadly categorised into 8 types. If you have a high credit score, no pending loans, a good employment history, and a stable income, your chances of getting a loan will be higher.
- Working Capital Loan: These types of loans can be utilised by individuals, entrepreneurs, start-ups, and MSMEs to meet their financial requirements. The funds can be utilised to increase staff, add machinery, stock the materials required, etc. These are short-term loans which can be up to INR 40 Lakh and the repayment tenure for this amount can be up to 12 months or more as per your requirement. The interest rate offered by banks and NBFCs for this type of loan is generally higher compared to long-term or general business loans. The lender sets a specific borrowing limit for the business, and the funds can only be used for designated business purposes.
- Term Loan: Here, the amount is scheduled to be repaid in regular payments, which are set for a particular period. It can be categorised into short-term, intermediate-term, and long-term loans. The repayment period typically spans from 12 months to 5 years.
- Equipment Finance: It is also known as machinery loans where funds are provided to borrowers for purchasing new equipment or upgrading existing machinery. Typically utilised by large enterprises and those in the manufacturing sector, this financing option also comes with tax advantages. Interest rates, loan amounts, and repayment periods vary between lenders, allowing businesses flexibility in choosing the terms that best suit their needs.
- Loan Against Property (LAP): A business loan against property is an excellent choice for those needing a substantial sum but lacking additional assets to pledge as security. It’s a loan secured against your property, offered by banks or NBFCs. Interest rates are crucial when borrowing, especially with LAP. The rate you get affects your total expenses and what you’ll ultimately repay over the loan term. Understanding the eligibility criteria, documentary requirements, and the process is important to help you understand the loan details before signing the LAP agreement.
- Letter of Credit: This is like a safety net used mainly in trading. It’s where banks or lenders guarantee funding for businesses involved in international trade. Entrepreneurs can use letters of credit for both importing and exporting goods. When dealing with unfamiliar overseas suppliers, businesses need assurance of payment before making any deals. That’s where a letter of credit steps in, ensuring suppliers get paid and transactions run smoothly.
- Loans under Government Schemes: The Government of India has rolled out several loan schemes for individuals, MSMEs, women entrepreneurs, and businesses in trading, services, and manufacturing. These loans are available through a range of financial institutions like private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), and Small Finance Banks (SFBs).
- Overdraft Facility: An overdraft is like a safety cushion provided by a bank to its account holders. It lets you withdraw money from your account even if there’s no balance, up to a certain limit. Interest is charged only on the amount you use, and it’s calculated daily. The credit limit you get depends on factors like your relationship with the bank, credit history, income streams, and how reliably you’ve repaid debts before. Banks usually review and adjust your overdraft limit every year. It’s flexible, too — you can use it for any purpose as long as you pay the interest on time. Some banks may require collateral, like fixed deposits, to secure the overdraft.
- Gold Loans: Gold loans are like borrowing money with your gold as security. They’re popular among small business owners because they’re quick to process, require minimal paperwork, and are easy to get. These loans are great for covering short-term business needs. With most banks and financial institutions, you usually pay only the interest on the loan regularly. The principal amount borrowed is repaid in full later, either as a lump sum or in smaller instalments. It gives you flexibility in managing your finances while using your gold to secure the loan.
Conclusion
You can get business loans with attractive interest rates and flexible repayment structures with comfortable EMIs. Whether you choose a business loan against property or a working capital loan, you must have a thorough understanding of the tenure and loan amount you are going to take. Before applying for any loan, you must also check your loan eligibility.
