Published on Mar 13, 2020Updated on Jun 2, 2026
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.
Business loans are financial instruments designed to provide capital for business-related expenses and growth initiatives. These loans are offered by banks, financial institutions, and alternative lenders to entrepreneurs and business owners. They can be used for various purposes, including starting a new business, expanding operations, purchasing equipment or inventory, hiring employees, or managing cash flow.
Access to business loans enables entrepreneurs to pursue their business goals, fuel economic growth, and contribute to job creation and innovation in the marketplace.
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.
At SMFG India Credit, we offer SME loans secured against property for businesses whose loan requirement exceeds INR. 75 lakh*. 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 loans 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 and 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 spending protection/insurance cover, etc. However, the rates could be higher than that of traditional business loans.
A letter of credit, commonly referred to as a credit letter, is a formal document provided by a bank to guarantee the timely and precise payment from a buyer to a seller. If the buyer fails to fulfil the payment obligation, the lender assumes responsibility for covering the outstanding amount owed. Essentially, it acts as a financial safety net, ensuring that sellers receive payment as promised.
Moreover, a letter of credit may also serve as a form of financial aid, resembling a loan facility provided by the bank to support the buyer's transactional needs.
An unsecured business loan refers to funds borrowed from a lender for business purposes without the need for collateral. Unlike secured loans that require assets as security, unsecured loans rely solely on the borrower's creditworthiness. This type of loan offers repayment flexibility, usually structured through Equated Monthly Instalments (EMIs). By not requiring collateral, unsecured loans expedite the borrowing process, allowing businesses to access funds swiftly to meet various operational needs, such as purchasing inventory, expanding facilities, or covering operating expenses.
However, lenders may impose higher interest rates on unsecured loans to offset the risk of default. Despite this, unsecured business loans remain a popular option for entrepreneurs seeking financing without risking their assets.
Micro, small, and medium enterprise (MSME) loans are unsecured and extended by various financial institutions to support entrepreneurs in meeting diverse business expenses. These loans cater to enterprises falling within specific revenue brackets, typically categorized based on their turnover or annual revenue. MSME loans offer flexible repayment terms and competitive interest rates, facilitating access to essential capital for business growth and development. By providing financial assistance without the need for collateral, MSME loans empower small and medium-sized businesses to invest in infrastructure, expand operations, purchase equipment, and manage working capital requirements.
* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us
Eligibility criteria for MSME loans typically include an age between 21 and 65 years, a business vintage of at least 2 year, varying annual turnover as per lender, a good repayment history, no previous loan defaults, a decent credit score, and eligibility for individuals, startups, MSMEs, business owners, women entrepreneurs, self-employed professionals, and various business entities like private or public limited companies, sole proprietorships, partnership firms, and LLPs.
To choose a small business loan, assess your needs, research loan options, compare offers, check eligibility, understand costs and terms, seek advice, and make an informed decision. Evaluate lenders based on interest rates, fees, repayment terms, and eligibility criteria. Ensure you understand all associated costs and select the loan that best suits your business needs and financial situation.
For an INR 10 lakhs business loan, the Equated Monthly Installment (EMI) depends on the loan tenure and interest rate. For example, for a 24-month loan at 15% interest, the EMI is approximately INR 5,000. Adjustments in tenure or interest rate will result in corresponding changes to the EMI amount.
Eligible applicants for a Business Loan include self-employed individuals, proprietors, private limited companies, and partnership firms engaged in manufacturing, trading, or services. The business should be operational for at least 3 years, with a total business experience of 5 years. Profitability for the past 2 years is required. Applicants should be aged 21 or older at the time of application, and not exceed 65 years at loan maturity.
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