Different Types of Business Loans in India

Small or large businesses alike frequently want more funding to cover ongoing expenses. The type of firm, its capital intensity, and its stage of development, all affect the amount of investment needed. Often, a company's earliest phases and future growth require the most funding. Below are the ten distinct kinds of business loans offered to Indian business owners:

• Letter of Credit
• Working Capital Loan
• Term Loan
• Invoice Discounting
• Loans under govt schemes
• Merchant Cash Advance
• Overdraft Facility
• Machinery Loan
• Business Loans for women

Now let’s take a look at each of them in more detail.

Letter of Credit

In a letter of credit, a bank or other lender provides a funding guarantee to businesses that engage in international commerce. This sort of credit limit is primarily employed in the trading sector. Entrepreneurs can use letters of credit for both import and export transactions. Foreign-based businesses frequently work with unidentified suppliers, therefore they need payment assurance before finalizing any purchase. A letter of credit is therefore essential for giving suppliers payment certainty.

Working Capital Loan

Small business working capital loans are sought to make up for the lack of funds needed to run a company on a daily basis. It produces the equilibrium in cash flow required to run a business. This loan can also be used to cover a cash flow gap in the off-season or satisfy demand during a high-demand period. Service providers, producers, wholesalers, merchants, or traders involved in exports and imports make up the majority of qualified candidates.

Term Loan

A term loan is one that has a predetermined repayment schedule that must be followed. There are three types of term loans: short-term, intermediate-term, and long-term. These three varieties have repayment terms ranging from 12 months to 5 years. Term loans that are of a shorter duration which is of 12 months are called short-term loans and loans up to 5 years or more are long-term loans. Up to Rs2 crore in collateral-free business loans are available, though they may go higher depending on the needs of the organization. At the time of loan application, the lender determines the length of repayment for a term loan.

Invoice Discounting

Invoice financing or invoice discounting are other names for invoice finance. Small firms in particular who have a delay in payment from customers can benefit from this kind of assistance. In relation to the amount claimed in the invoice, the financial institution advances money. 80% of the invoice amount may be financed by the lender. After receiving the payment, the company pays down the debt according to the agreed-upon duration and interest rate.

Loans under govt schemes

The Indian government has launched a number of loan programmes for people, MSMEs, women business owners, and other organisations operating in the manufacturing, service, and trade sectors. Many financial organisations, including Private and Public Sector Banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), etc., provide loans through government programmes. The Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, and other popular government loan programmes are just a few examples.

Merchant Cash Advance

In this case, the financial institution advances money against a share of the daily sales of credit or debit cards. The advance must then be repaid by the borrower using a share of each day's credit sales. The borrower is responsible for making sure that there is sufficient cash flow to cover the payments. The benefit of a merchant cash advance is that payments must be made in accordance with daily sales. The amount to return is therefore lower when business is slow and higher when business is booming.

Overdraft Facility

A facility for overdrafts is offered in exchange for assets or other forms of collateral, particularly fixed deposits with the financial institution. When authorising a certain fixed overdraft limit, the lender considers the borrower's credit history, relationship with the institution, business cash flow, and payback history. The borrower is permitted to withdraw the required amount and just pay interest on that sum. As long as the principal and interest payments are made according to the agreed-upon term, the funds may be utilised in this way.

Machinery Loan

Typically, manufacturing companies choose equipment financing or a loan for machines. The operation of manufacturing units requires expensive equipment. And of all the business loan options, equipment financing is the one that is most frequently used to finance the purchase of machinery. This is due to the special nature of machinery loans, which require the use of both other security and the equipment in question as collateral. There is a chance that the interest rates will be less than those for term deposits.

Business Loans for women

For women business owners, certain financial institutions have unique financing programmes. Even the Indian government has programmes in place to support women who want to start small to medium-sized enterprises. Specialized loans for women business owners have benefits like customizable loan amounts, start-up loans, lower normal interest rates, and quicker loan processing.

It is best to choose a business loan depending on the needs and characteristics of your particular firm. Your decision regarding the type of finance that is most appropriate for your business will be aided by the information that has been provided above.