Different Types Of Business Loans That One Could Opt For


Different kinds of business have different kinds of needs. This means that there are various kinds of ways through which an enterprise can raise loans. Listed below are some of those options.

Working Capital

A working capital loan is one taken to overcome a short-term shortage of cash. This is generally used when cash in the business is not enough to take care of the day-to-day operations of the company.

A working capital loan can be used for the seasonal shortfall of cash, irregular cash flow or to cater to a sudden spurt in business.

A manufacturer, service provider, retailer/wholesaler or a trader engaged in imports/exports can apply for working capital loans.

Working capital loans are generally in the range of 6-12 months and interest rates depend on the credit assessment of the firm but can depend anywhere between 12-16%.

Banks generally ask for collaterals, however, new age financial companies have been known to provide collateral-free loans. Collateral can be anything like residential, commercial, industrial property, or even shares, stock, book-debts, and gold. Credit facility under a working capital loan is generally around Rs 25 lakh and one can expect processing and renewal fees to be associated with such loans.

Some types of the working capital loan include the business line of credit, cash credit / Overdraft, Packing Credit and Post Shipment Finance. There are other modes of working capital loans, primarily for the export community, like Letter of Credit (LC), but the RBI has recently banned Letter of Undertaking.

On the other hand, the line of credit is popular where a business has a certain amount of fund that is earmarked and that can be tapped in a revolving manner.

It is like a credit card where a certain sum of money is available and there is the option to utilize it in tranches and repay it back within stipulated time and after paying interest. The interest rate on the line of credit is lower but can go up if one fails to repay in a stipulated time.

Term Loan

These are standard loans where one can apply for credit for a specific purpose and get a lump sum amount. These are long-term in nature and often utilized for capital expenditure. The tenure is fixed, the amount of loan available is generally higher and depending on the credit profile of the business, the rate of interest can be lower. Although collaterals are preferred, in some cases it can be unsecured in nature.

Terms loan can range between 5 to 20 years and can have fixed or variable interest rates. Such credit will appear in the books of accounts as debt and it is important to show why the loan is required, the financial projections of the firm and the repayment capacity.

Equipment Financing

These types of loans are predominantly used by the manufacturing businesses. Equipment, though expensive, can be crucial for the operation and expansion of a business. To purchase equipment, most banks have specialized loan products to meet this need and tends to be at the upper limit of Rs 25 crore.

Some banks provide equipment financing products for as high as Rs 100 crore. The tenure for such loans are fixed and maybe in the range of 4-5 years, interest rates can be lower than term deposits and the equipment is generally taken as a collateral, along with some additional security.

Most banks offer manufacturing equipment loans, but banks also have specialized product around construction equipment loan. IT and office equipment and healthcare equipment loans are also provided by banks.

Invoice Financing

Invoice discounting and financing is a powerful tool to raise capital. This can provide a great way for small businesses to find working capital.

There is often a time lag between when a business raises an invoice and when it finally gets paid. In such a situation the company can approach a bank or a financial institution to provide a loan against the invoice. About 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is paid in full by the customer. The lender will deduct the processing fee and interest, which is generally very low, from this amount.

The Receivables Exchange of India Ltd (RXIL), a joint venture promoted by Small Industries Development Bank of India (SIDBI) and the National Stock Exchange of India Limited (NSE) is a great way to get invoices financed and small business should consider registering on such platforms.

Pradhan Mantri MUDRA Yojana (PMMY) is a scheme specifically for the MSME industry in the non-farm sector. These loans are given by commercial banks, RRBs, small finance banks, cooperative banks, MFIs, and NBFCs. The loans under this scheme are available under three products – Shishu, Kishore, and Tarun to signify the stage of growth/development and funding needs of the enterprise.

Shishu generally covers loans up to Rs 50,000, Kishore between Rs.50,000 to Rs.5,00,000 and Tarun covers loans between Rs 5,00,000 and up to Rs. 10,00,000. The loan can be used to buy a commercial vehicle, car loan, and two-wheeler loan, loan for working capital requirement, buying plant and machinery, renovating offices etc. Collateral under this scheme is not needed.

Stand Up India

This scheme is targeted at entrepreneurs from the Scheduled Caste (SC) or Scheduled Tribe (ST) and women entrepreneurs who intend to set up a venture. However, it is not meant for enterprises which have already started operations.

In case of non-individual enterprises, at least 51% of the shareholding and controlling stake should be held by either an SC/ST or woman entrepreneur.

Banks provide collateral of Credit Guarantee backed loan and can be anything from a commercial vehicle loan to office equipment loan. Loans between Rs 10 lakh to Rs 1 crore are available under this scheme.

This list though not exhaustive can be helpful to those who are in need of business loans.

Also Read: Debt funding: Addressing mismatch in expectations between yourself and lenders