Do business loans in India only mean term loans? How do you choose the right business loan for your small business? How many types of loans are available for business in India? If you’re confused about the previous questions, here’s a blog to explain the different types of business loans to help you make an informed choice.
The most obvious choice for start-ups or MSMEs is to sign up for a term loan. Term loans require regular payments over a period. You can opt for short-term, intermediate, or long-term loans as a small business. Time is of the essence for term loans, as the tenure ranges from twelve months to five years.
Your lending institution fixes the tenure of a term loan. They are often collateral-free and thus convenient as start-up loans. Lenders agree to sanction up to two crores. However, the amount also depends on the business type and requirements.
Letter of Credit
The letter of credit offers business owners a credit limit. It is a dependable option for people dealing in the trading business. In this case, the lender becomes a funding guarantor during international trade. It is applicable during both import and export in India.
The letter of credit is convenient during international transactions with unknown suppliers. It acts as reassurance concerning the payment for these suppliers.
The start-up loan covers the expenditure for new businesses or start-ups. It comes in handy when the borrower does not have a credit history, unlike a term loan. The assessment for the sanction of a start-up loan comprises the anticipated turnover of the venture. However, the start-up must be pre-established before any loan amount is sanctioned.
Loan against Property or Real Estate
The loan against property helps to sanction amounts greater than fifty lakhs. It allows you to mortgage your property for a period. The lender has total discretion over the repayment tenure and loan terms. A lending institution sanctions loans not more than seventy percent of the property’s value. Its tenure is longer than that of a term loan.
The repayment tenure for loans against property ranges from ten to twenty years. The loan is applicable for both commercial and residential properties. However, the property must be legal and free of litigation.
Business Loans for Women
To encourage participation from women owners, lenders in India have flexible business loans for women. It allows women to apply for MSME loans with lucrative offers. The terms for these business loans are often better than regular loans.
Working Capital Loans
Working capital loans are convenient for businesses under financial strain. It allows the applicant to access more capital than a regular term loan. The repayment tenure for working capital loans is short and the interests are high. However, it will tide your business over during a financial emergency.
Invoice financing is one of the small business loans available in India. A small business often faces financial strain during a payment cycle. As a small business owner, you may face delays between raising invoices and receiving payments. In this case, the loan helps you meet regular financial requirements. The business loan is provided against the amount raised in the invoice. It is why invoice financing is also known as invoice discounting or factoring. You receive eighty percent of the amount mentioned in your invoice. After receiving the invoice payment, the business repays the loan in monthly settlements.
A machinery loan or equipment financing accrues lower interest than a term loan. It requires collateral, and it has a specific purpose. For instance, you can apply for equipment financing as a manufacturing business owner. In this case, the lender will cover the expense of a costly machine or equipment.
A cash advance is more common for merchants in India. It allows you to return the loan amount with a part of the daily debit or credit card transactions. The repayment for a cash advance is linked to debit or credit transactions at Point of Sales machines. Though the interest rate is high, it allows the merchant to reduce the burden of a liquidity crunch.
If you have a credit history or collateral, an overdraft facility might boost your business. You can avail of a business overdraft if you have a fixed deposit with the lender. In this case, the lending institution considers your repayment and credit history before approval. An advantage of the overdraft facility is the interest is paid only on the amount you utilize.
Business loans affect your business growth
The type of business loan you choose affects your business growth. It is crucial to find a business loan that caters to your financial requirements. You can always consult a loan expert like Andromeda for more detailed terms. Additionally, create a pros and cons list for every type of business loan available in India to help you make a choice.