Types of Loans that a business can go for

If you own a small business, chances are there that you may have taken a small business loan. It is particularly important to understand what kind of business loans is available in the market.  Here we enlisted the types of business loan that you can consider when searching for money. Though the list is not exhaustive, it provides you with a clear idea about the choices that you can make.

1 – Working Capital

This kind of business loan is taken by the businesses to bridge the working capital requirements of the business. It is generally used by the business when the cash or funds are not enough to take care of the daily requirements or to cater a sudden expenditure of the business. The manufacturer, retailer, wholesaler, or a trader that is engaged in exports and imports of the goods can apply for working capital loans.

These loans generally come with tenure of 6-12 months and interest rate depends upon the credit score of the organisation. It can vary between 12-16% and banks generally ask the businessman to submit collaterals, but there are certain modern-age companies that offer collateral-free loans.

The credit amount that can be availed by the businessman is around Rs 25 lakh, and one can expect the other charges like processing cost and renewal fees. The working capital loans are further categorised into a business line of credit, overdraft, letter of credit, etc.

RBI has recently curtailed Letter of Undertaking, and on the other hand line of credit remains the popular option amongst the borrower.

2 – Term Loans

These are the standard loans that can be taken by a business venture for a specific purpose, and in turn, the businessman can get a lump-sum amount from the financial institutions or banks.

It is a long-term loan which can be utilised to accommodate the capital expenditure.  The tenure of such loan is fixed, and the amount of loan available depends upon the credit score of the business. Lender prefers to give loans to the individuals that can bargain for collateral. The loans can range in between 5 to 20 years with variable interest rates.

Such credit will appear in the account books, and the businessman needs to show a strong reason why they may need such a loan.

3 – Equipment Financing

These types of loans are predominantly taken by the manufacturers. The equipment tend to be expensive but are crucial for the smooth running of the business.  Hence, most of the banks today offer equipment financing loans to meet the requirements.

The upper limit of the loan that can be taken by the business is Rs 25 crore. However, there are certain banks that have funded 100 crores depending upon the collateral.

4 – Invoice Financing

Another type of business loan taken to fund working capital requirements in invoice financing. As the name suggests, this loan is taken against the invoice. There is generally a gap between when the business raises an invoice and when it is finally paid by the client.

In such a scenario, the businessman can approach the bank or a financial institution to provide the loan. The banks may provide 80% of the loan and remaining 15% when the invoice is fully paid by the customer. The bank will deduct the interest rate and processing fees from the loan amount.

It is evident that a business needs different types of business loan to cater to their daily requirements. By getting the right type of financing at the right time, the growth of the company is assured.

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