Published on Mar 13, 2020Updated on Sept 12, 2023
Business finance may seem tricky at times. Especially in a dynamic environment like today, as a business owner, you may often find yourself wondering about the best possible way to fund a particular business need. Business needs can vary between purchasing assets such as land or leasing a factory or shop or purchasing new machinery, or working capital requirements, or basic operating expenses such as overheads and salaries. However, it is important to note that there are different types of business loans in India that are best suited for a particular situation.
Here are 10 different types of business loans available for entrepreneurs in India.
One of the most common types of business finance is a term loan. The loan could be secured or unsecured in nature. The amount available depends on the business’s credit history. The tenure is fixed, ranging between 1 and 5 years if unsecured, or up to 15 - 20 years for secured business loans. A term loan is taken for a specific purpose, generally for capital expenditure. The lender disburses the approved fund in a lump sum amount.
A start-up loan is for new business ventures. Applicants for such loans may not have a great credit history on their company due to a lack of business vintage. Thus, to judge the business loan eligibility, the lender will take into account the borrower’s personal credit profile along with that of the company. The current turnover figures and other financials are also considered to decide the loan amount, tenure, and interest rate applicable. The business should be established, and the applicant must submit proof of the business existence and registration.
Working capital loans are types of small business loans taken to overcome the shortage of cash to operate a business on a day-to-day basis. It generates a balance in cash flow necessary to run a business. This loan is also helpful to deal with a shortfall of cash during the off-season or meet demand during a peak season. Most eligible applicants are service providers, manufacturers, wholesalers, retailers or traders engaged in exports and imports.
Note: To understand the monthly instalment, you can take the help of a business loan EMI calculator available on our website.
Must Read: What are the Benefits of Business Loan?
At SMFG India Credit, we offer SME loans secured against property for businesses whose loan requirement exceeds Rs. 75 Lakhs*. Here, the applicant has to mortgage his/her property to avail of funds for business purposes. The borrower can apply for funds against either a residential or commercial property. Lenders can finance up to 70% of the current market value of the property. The title to the property should be clean and free from encumbrance. The mortgaged property should also be free of litigation. Tenure of such loans is up to 15 - 20 years, depending on the terms and conditions set by the lending institution.
Invoice financing is also known as invoice discounting or invoice factoring. This type of funding is especially for small businesses that encounter a time lag between raising invoices and receiving payment from the clients. The financial institution provides funds against the amount raised in the invoice. The lender can finance up to 80% of the invoice amount. Once the business receives the payment, it clears off the debt as per the decided tenure and interest rate.
It is the manufacturing businesses that usually opt for equipment financing or machinery loan. Manufacturing units require costly equipment for the operation of their business. And to purchase the machines, out of all the types of business loans, equipment financing is the most preferred one. This is because machinery loans are specific in nature, wherein the equipment in question is taken as collateral along with some other security. The interest rates could be lower than those charged on term deposits.
Some of the financial institutions have special schemes on business loan for women entrepreneurs. Even the government of India has initiatives in place to encourage women in establishing small to medium-sized businesses. The advantage of specialized loans for women entrepreneurs includes a flexible loan amount, start-up loan, discount on the standard interest rates, and a faster loan process.
An overdraft facility is provided against securities or collateral, especially in terms of fixed deposits with the financial institution. The lender analyzes the borrower’s credit history, relationship with the institution, business cash flow and the repayment history before approving a certain fixed overdraft limit. The borrower can withdraw an amount required and pay interest only the utilized amount. The funds can be used in this manner as long as the principal and the interest amount are repaid as per the decided term.
Here, the financial institution provides an advance of capital on a portion of daily debit card sales or credit. The borrower has to then repay the advance with a portion of the daily credit sales. The borrower must ensure that he/she has enough cash flow to manage the payments. The advantage of a merchant cash advance is that the person has to pay as per the daily sales. So, if the business is slow, the amount to return is also low, and when the business is doing well, one can repay more.
While a business credit card is not the very first option that business owners may select to finance their needs, it is still great for a short-term and immediate funding option. If the business owner is in need of fast cash at the same time wants to earn rewards against payments done on debt, then a business credit card is a right option. Several financial institutions attract customers to this type of funding by offering benefits such as introductory cash back on spends protection/insurance cover, etc. However, the rates could be higher than that of traditional business loans.
It is advisable to select a business loan based on your individual business profile and requirement. The above-provided information will help you as a business owner decide the type of financing best suited for your venture.
SMFG India Credit offers different types of business loans in India. Our collateral free or unsecured business loans for small businesses up to Rs. 75 Lakhs* are available with flexible repayment tenures ranging upto 48 months*. To know more, apply now or contact us today. Our representative will get in touch with you with further details.
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*Terms and Conditions apply. Loans are disbursed at the discretion of SMFG India Credit.