The evolution of India has been dynamic, making it a budding ground for the established as well as the aspiring business owners. These businesses are the backbone of the Indian economy, offering significant value to their customers by making the local communities stronger. However, the needs associated with starting or operating a business are varied and investment intensive. These include the requirement of working capital, funds to purchase raw materials, hire employees, accelerate growth, scale-up marketing strategies, and upgrade the technology. This is where business loans come into play.
With consumerism as the bedrock of India’s economic growth, taking up loans, and repaying them in the form of EMIs has become a norm. There are multiple business loans options available in the Indian market. However, assessing your goals or requirements to align them with the loans you opt for becomes a determining factor in helping you maximise the benefits.
Read on to know more about the various types of business loans in India. It will give you a fair idea about the choices that are available at your peril and enable you to facilitate your decision making process in the best possible interest of your business.
Types of Business Loans in India
Before diving into the different types of business loans, let’s first understand what business loans are. A business loan is a type of financing that involves the creation of debt which your business has to repay as per the terms and conditions agreed upon at the time of availing it. In India, Non-banking Financial Companies (NBFCs), banks, or people offer these loans.
Here’s a list of business loans that are sanctioned by these financial institutions in India:
- Working Capital Loan
Working capital loans are the financing which various individuals, startups, Ministry of Micro, Small, and Medium Enterprises (MSMEs), and entrepreneurs take to meet their everyday business requirements. These loans also enhance the business cash flow, help purchase raw materials, facilitate services for business expansion, inventory or stock, payment of salaries to the employees and hiring them.
Amounting up to Rs. 40 lakh with a repayment tenure of up to 12 months or more based on the business requirements, they are short-term loans. Working capital loans are offered by Non-banking Financial Companies (NBFCs) and banks at higher interest rates relative to the long-term or general business loans.
- Term Loan (Short & Long Term Loan)
A term loan is a standard long-term loan which offers you a lump sum payment in the form of cash upfront in exchange for particular borrowing items. They are usually meant for the small businesses which are established and possess sound financial statements. They are offered to them to facilitate their goals of purchasing equipment, a new building to fulfil their production needs, and other fixed assets to maintain the operations of their business. These loans may include a collateral and a substantial amount of down payments in order to mitigate the total loan cost. Their loan tenure ranges from 1 to 5 years typically.
- Start-up Loan
The Start-up Loan is a collateral free financing scheme which targets the entrepreneurs belonging to the Scheduled Castes (SCs) or Scheduled Tribes (STs) and women who wish to build a venture. These ventures are not directed towards the enterprises and have functional operations. However, if there is a non-individual enterprise, it is imperative that at least 51% of the organisation should be controlled by either a woman or an ST/SC entrepreneur.
The credit history doesn’t necessarily have to be the best, however, the business requires to have been established for at least a certain span of time to sanction the start-up loan.
- Loan Against Property
If your business requires a loan amount greater than Rs. 50 lakh, a loan against property is the perfect option for you. This loan is offered with a collateral security for a tenure that ranges from 10 to 20 years. In order to be eligible for availing this type of financing, you must provide a property, either residential or commercial, as a collateral for security.
You can get a loan of up to about 70% of your asset’s value. However, you must ensure that the collateral asset is devoid of any type of litigation.
- Equipment Financing
This type of financing scheme is majorly available for the businesses belonging to the manufacturing industry. The equipment involved in their businesses are expensive and are crucial for their operational or expansion purposes. Hence, many banks or NBFCs offer specialised loans with an upper limit of Rs. 25 Crores in order to help these businesses meet such needs. Few banks even offer equipment financing loan products valued as high as Rs. 10 Crores.
These loans are offered for tenures ranging from 4 to 5 years with interest rates that are lower than the term deposits. However, the equipment and an additional asset are usually taken as collateral.
- Business Overdraft Facility
This facility is a type of funding which is offered by a bank to its customers to withdraw cash from their accounts despite the account balance being zero. If your business holds fixed deposits with a financier, you will be provided with a business overdraft facility. In this case, the lending institution analyses the repayment history, business cash flow, fixed deposit tenures, and other factors to sanction the credit limit. The limit of the overdraft facility is revised on yearly basis and it is offered against securities or collaterals, specifically in terms of fixed deposits. With this facility, a required amount from the FD can be secured and you will have to pay the interest only on the used amount. These funds can be utilised for any purpose with respect to the business.
- Invoice Financing
Invoice financing is considered to be one of the most powerful tools used to raise capital. There is usually a time lag between the time when a business raises an invoice and that when it is actually paid. In that case, you can approach the banks or NBFCs to provide you with a loan against the invoice. Approximately 80% of the invoice amount is provided as a loan and the remaining remains due for the time when the invoice is paid. The minimal interest amount and the processing fee are deducted from this amount by the lender.
The Receivable Exchange of India Limited, National Stock Exchange of India Ltd., and Pradhan Mantri Mudra Yojna facilitate invoice financing for small businesses and the MSME industries.
- Point-of-Sale (POS) Loans
Also known as Merchant Cash Advance, POS Loans is a mechanism whereby the owner of a business pays a huge amount of money in advance to the supplies through their future credit or debit card transactions. These loans reduce the liquidity crunch which is usually experienced by the Small and Medium-sized Enterprises (SMEs).
These rates of interest offered under these loans are relatively higher when compared to other types of business loans. The POS machines installed at grocery stores, retail shops, shopping malls, and supermarkets are linked with credit or debit card transactions.
- Letter of Credit
Letter of credit, a type of credit limit, is used mostly in businesses belonging to the trading industry. This feature can be used for export as well as import purposes by the entrepreneurs. International enterprises usually deal with unknown suppliers, so a letter of credit provides them with payment assurance prior to transactions.
- Cash Advances for Merchants
This is a funding facility that serves a business’ short-term needs. You can immediately obtain cash in case of urgent requirements. With the help of a business credit card, you can reap benefits like credit points, cash backs, and insurance covers. However, the interest rates in such financing facilities are much higher.
It is quite evident that there are various types of business loans available in the Indian market and can be availed at attractive interest rates with simple and flexible EMI plans. You must compare these loans that the various financiers offer and choose the one that best suits your financial goals or requirements.