InvestorQ : What are the different types of business loans that exist in Indian market?
Ishita Jain made post

What are the different types of business loans that exist in Indian market?

Ayushi Kampani answered.
3 years ago

Every business person would want to do everything to help grow and expand his/her business and for this he might need funds urgently from time to time. This is the very purpose for the existence of business loans.

However, it is imperative that we understand what kind of business loans exist in the market, before opting for any one loan. So, here are four types of loans that are easily available for business owners for their varied needs:

1. Working capital loans: Working capital loans are the kind of loans that are required by companies to meet their regular operating expenses. This includes all the various kinds of expenses that go into the daily functioning of the company. Having sufficient working capital is vital for the survival of any business.

Based on whether you provide any collateral against the loan you receive from a bank/NBFC, a business loan can be further classified as:

- Secured loans: These are the loans that you can get on offering some sort of a collateral, such as equipment, accounts or other security. Based on the value of your collateral, a lender approves your loan amount.

- Unsecured loans: These are the loans that are offered by bank/NBFCs without taking any type of security or asset as a collateral. However, most companies find it difficult to avail such types of financial arrangements.

2. Term loans: These are the loan that are available for short-term as well as long-term period. The tenure on short-term financing may extend up to three years, while long-term loans may vary from 10 to 15 years. Most companies use these facilities to fund expansion plans or set up new facilities. Term loans are repaid through monthly instalments and often have competitive business loan rates. Well-established companies with a strong track record often find it easier to avail term loans.

3. Overdrafts: An overdraft is a temporary financing option available for business owners against their current accounts. Based on the agreed terms and conditions, a customer is allowed to overdraw beyond the available funds in the current account. In case the overdraft exceeds the sanctioned limits, then the lender usually charges a higher rate of interest.

4. Start-up loans: These are the loans that banks/NBFCs offer an SME (small and medium-sized enterprise) for funding a start-up. Do note that this type of financial arrangement is only available for entrepreneurs with an exceptional business plan and revenue model. The general rule is that lenders require some form of collateral to finance start-up ventures. The institutions analyze the credit history of the entrepreneurs, educational background, the feasibility of their business plan, and the assets and liabilities of the promoters before sanctioning the loan. Not just this loan, several special programs and schemes are available for start-up ventures to fund their businesses.

Thus, before you apply for a business or SME loan, do analyse your need and then apply for the loan that’s right for you!