Know about the different types of business loans
Are you planning to apply for a business loan? Then you should know about the various types of business loans that you can get in the market. This would help you to use the funds as per your requirements at various stages of your business. Having an idea about different types of loans would help you to choose them according to your eligibility, repayment ability, and requirement. Whether you start a new business, carry on the day-to-day operations, or are dealing with an unexpected loss, you would require funds. It is the same scenario if you want to expand your business. Read on to know about the different loans for your business in the following sections.
The different loan options that are available include the following:
Working capital loan
Business owners use them to meet the daily finance for running a business. For example, you need funds for buying machinery/equipment, managing cash flow for the business, purchasing raw materials, increasing the inventory, paying wages and salaries to your workers, etc. They are usually short-term loans and the repayment tenure is about a few months to maybe a year. It is a type of unsecured loan. Here you do not have to keep collateral or mortgage with the lender. But it may happen that the lender may set a limit for the loan amount. In that case, you have to use it for particular business purposes.
Term loans
You have to repay back these types of business loans in EMIs (equated monthly instalments) or other ways, over a fixed period. There are two types of term loans- short-term and long-term. The repayment period also varies, for example, from a few months to more than 5 years, depending on their duration. The loan amount also varies. They may range from a few lakhs up to several crores. The repayment tenure are usually fixed by the lender.
Letter of credit (LOC)
This is a type of loan when the lender provides a guarantee that he will be providing funds if you deal in international business. It can be related to imports or exports. If you deal with suppliers, whom you do not know well, the LOC would act as guaranteed payments to your supplier from your end. LOC is an important feature of international trades.
Bill discounting
This loan is also known as invoice discounting. The seller in a business transaction in this case gets an advance fund at a discount from the lender. The buyer has to provide an interest rate payment, or monthly fee, etc, to the lender.
Overdraft
It is funding offered by lenders, for example, banks. Here the borrower can withdraw cash from the bank account, in the form of a loan. He can do this even if there is no money in the account. The lender will charge an interest rate on the amount that you have used out of the entire sanctioned amount. The loan amount may depend on your previous relationship with the lender, your CIBIL score, etc. The lender may revise the rules related to the overdraft limit and its utilisation on an annual basis. It is a secured loan, and you have to keep a mortgage.
Loan for equipment finance
This funding is also called a machinery loan. Lenders offer it to business owners for buying new equipment and machinery, upgrading the existing ones, etc. Equipment finance loan is used mostly by big firms. You can get tax benefits on the loan. The interest, loan amount, and repayment period may vary among lenders.
POS Loans
Merchant Cash Advance or POS loans come in handy if you are paying a lump sum amount to your suppliers in advance. You can use your credit or debit card, for this loan. The interest rate for this loan is usually high.
Whether the business loan interest would be high or low depends on the type of loan that you are applying for. If you take a business loan against property, you may have to pay a lower interest rate as you are keeping security with the lender. In case of non-repayment, the lender can claim ownership of the mortgage.
On the other hand, if you take a loan without security, the lender faces a higher risk of non-repayment. So, he may impose a higher rate of interest on the loan. There are different types of business loans that you can apply for and which you need for various phases of your business.
Starting from short-term or long-term loans, secured or unsecured loans, and repayment of the loans through debit card and credit card options and other forms of payment, you have a variety of choices. Before you finalise the loan, compare the rates of interest, loan terms, and conditions, and the eligibility criteria mentioned by the lenders. Visit their online portals or branch offices to pick the appropriate fund that you require.