Types of Business Loans in India: A Comprehensive Guide

You are running your own business and enjoying the perks of being your own boss. Although owning a business unlocks many lucrative opportunities for you, you can’t make the most out of your business without investing much discipline, time, effort, and money.

Whether you are operating a small-scale or large-scale business or a start-up, capital is a must to manage, expand, maintain, or introduce measures in your organisation. To meet the funds requirement, entrepreneurs must secure adequate finance. In India, almost every other business owner secures finance in the form of business loans. You can find many banking and non-banking institutions in India offering different types of business loans at a reasonable business loan interest rate.

Here, we have brought you a list of different categories of business loans you can apply for in India to meet your needs.

What is a Business Loan?

A business loan denotes a financial arrangement between an entrepreneur and a banking or non-banking institution under which the latter gives funds to the former only to eventually pay back the principal amount in addition to interest.

In other words, a loan provider offers entrepreneurs a certain amount of money (principal) subject to predetermined conditions, including business loan interest rate, payback period, structure, and more. Moreover, the lender determines the principal amount and all business loan-related conditions after evaluating your business and creditworthiness.

Exploring Different Types of Business Loans in India

If you’re looking up business loan apply online options, it’s a good idea to be familiar with the choices available to pick the most suitable type of financing. Here outlined are some types of business loans that can best fit your organisation’s needs:

1.    Working Capital Loan

Short-term business loans, i.e., working capital loans, are explicitly designed to help businesses secure extra cash to cover their day-to-day operational expenses, manage accounts payable, purchase inventory, pay salaries, and address other short-term obligations.

In addition, you can use the working capital loan to cover emergency costs and pay the debts.

Securing this type of loan is key for entrepreneurs to support their business’s financial stability, ensure smooth operations, and facilitate growth.

Key Features

• Loan amount: Your lender will assess your business needs, financial stability, credit score, working capital requirements, etc., to determine your loan amount.
• Interest rates: You can be charged fixed or floating interest, depending on the loan provider’s terms.
• Payback tenure: Usually, such business loans have a short-term payback period, ranging from a few months to a couple of years.
• Collateral: Working capital loans might or might not require collateral, depending on your business’s creditworthiness.

2.    Term Loans

When it comes to loan for business, you might have commonly heard of term loans. If you are thinking of commencing a business or planning to extend it, your best recourse to seek funds is applying for term loans.

This type of business loan allows you to borrow a certain sum of money for a predetermined period, ranging from a year to five years or more, depending on the loan provider. You can pay back the term loan in regular instalments over the entire loan repayment tenure.

Key Features

• Loan amount: The loan provider will assess your business’ creditworthiness, funds requirements, and your repayment capacity to determine the term loan amount.
• Interest rate: Similar to working capital loans, you may be charged a fixed or floating rate of interest for term loans.
• Payback period: The repayment tenure for term loans can be within a few months or several years.
• Collateral: Every loan provider usually asks for collateral in the form of assets/property/financial instruments when it comes to providing approval for a term loan.

3.    Invoice Financing

Invoice financing or factoring is another common financing option for businesses to secure funds. This method requires your business to sell its unpaid accounts receivables or invoices to a third party or factor at a discounted rate.

You might wonder who is the factor. Well, usually, banks and financial institutions work as a factor that provides businesses access to immediate working capital equivalent to their unpaid invoices. This arrangement can help your business optimise its cash flow, meet operational expenses, and drive growth.

Key Features

• Loan amount: The factor usually lends businesses 70% to 80% of their invoice value.
• Fee: Almost all factors levy a fee, usually a certain percentage of the business’ invoice value.
• Payback period: It’s a short-term financing option with a payback period of a few months.

4.    Loan Against Commercial Properties

A loan against commercial properties is a type of business loan that you can secure by mortgaging your non-residential or commercial properties to the lender. Businesses owning commercial properties can readily mortgage them to avail of a high-value loan at reasonable interest rates. Usually, entrepreneurs seek such business loans to meet their long-term obligations, purchase machinery and equipment, pay high-value debt, etc.

Key Features

• Loan amount: To determine the loan amount, your lender will assess your firm’s annual revenue, financial requirements, and loan repaying capacity.
• Interest rate: You are charged an affordable interest rate as commercial properties are mortgaged as a guarantee.
• Payback period: These are usually long-term loans with a payback period of a year or more.
• Collateral: Loan providers ask for non-residential properties as collateral.

5.    Business Line of Credit

A flexible business loan, a business line of credit, asks the borrower to pay interest on the total amount he/she borrowed. As long as you don’t exceed the predetermined credit limit, you can draw funds when needed and repay them when possible.

It’s an ideal business loan option for firms seeking an easy way to manage their cash flow and daily operational expenses.

Key Features

• Loan amount: The lender assesses your business, short-term capital needs, and creditworthiness to fix the loan amount.
• Interest rate: Your loan provider will specify the interest rate, depending on your business repaying capacity.
• Payback period: The repayment tenure is fixed by the lender, and you can withdraw and repay the funds as many times as you want during this period.
• Collateral: This business loan is unsecured and, thus, doesn’t require any collateral.

Conclusion

Securing funding for your business can be mind-boggling. Opting for the traditional means to seek funds, i.e., applying for a business loan, can prove to be the convenient solution for your entity. All you need to do is choose the right type of business loan and complete the business loan apply online process to ensure your firm’s sustainable growth.