Types of Business Loans in India You Should Be Aware Of

All businesses, big and small, need a steady supply of capital to fund daily expenses as well as to finance expansionary operations. However, it is not always possible for a business to fund itself using its own capital  alone. This is where business loans come into the picture. 

Business loans are financial instruments that enable businesses to borrow and repay the same over a fixed period of time at a predetermined rate of interest. Essentially, a business loan involves the creation of debt intended to finance business purposes.

There are various kinds of business loans in India,viz- based on the collateral provided, the intention of the loan, the loan tenure, category of  the borrower, etc. In this article, we will provide a brief overview of some of the most popular types of business loans in India. However, it must be noted that many of these loans have similar terms and conditions, and they often overlap between each other. That said, there are certain eccentricities unique to each kind of loan.

Term Loan

A term loan is a financial instrument that has a fixed loan amount and a fixed repayment schedule (or “term”). These kinds of business loans usually don’t have end-usage restrictions and are used to finance various long-term fixed assets, such as buildings, properties, factory equipment, etc., as well as to meet immediate business expenses. Furthermore, some lenders canalso provide the business with the option  of converting the debt into equity.

Term loans typically have a fixed repayment schedule that can range from monthly to quarterly. The typical repayment period for a term loan in India can extend up to 3-5  years, although this varies based on the lender. Based on the tenure of the loan, term loans can be categorised into two  types: short-term loans, and long-term loans.

Loan Against Property

A loan against property (LAP) is a commercial loan where the security or collateral pledged is a residential, commercial, vacant property. Crucially, availing an LAP does not mean that you have to vacate your property; you can continue staying in your property even after you have pledged it as collateral (provided you don’t default, of course). 

Since a loan against property involves a major security, it isrelatively easier to procure. Moreover, the loan amounts and loan tenures for these kinds of loans are significantlyhigher than collateral-free loans. Interest rate is also usually lower in these loans.

Working Capital Loans

A working capital loan is a loan taken to meet immediate working capital requirements , which include employees’ wages and machinery upkeep. Many companies see seasonal rise and fall in demand due to consumer sentiment, market dynamics or the very nature of the product or service they sell. For such firms, working capital loans provide the urgent capital required to finance peak-season demand or plug cash shortfalls during off-seasons. 

As these loans are intended to finance short-term needs, they are generally not used for long-term planning or business expansion. They can be secured or unsecured and have variable interest rates depending on the company’s financial health, credit score or business plan.

Equipment Financing

This kind of loan, as the name suggests, is taken out to purchase equipment or machinery. Usually, equipment financing loans entail using the equipment to be purchased with the loan as the collateral for the same. 

Most lenders provide equipment financing loans for all kinds of equipment. However,some prioritise certain kinds of equipment, such as construction and mining equipment, medical equipment etc.

Business Loans for Women

These are financial inclusion schemes or loans issued solely to female entrepreneurs. The lenders can be commercial banks, government bodies, non-governmental organisations, etc. Such schemes are tailored to encourage more women participation in the business space by making it easier for them to procure capital to start their own entrepreneurial ventures.

Business Credit Card

This is a non-conventional financial instrument. However, it can also be used to fund immediate or minor expenses. 

Using your personal credit card to meet business-related expenses is not advised since not being able to repay your debts would adversely affect your personal creditworthiness. What’s more, the credit limit of a business credit card would be relatively higher than of a personal one. A business credit card also entails various offers and deals. Credit limits on such cards depend on the credit history of the company and cangenerally range up to ₹25,00,000, provided you meet the eligibility criteria of the respective lender.

Business Overdraft

A bank overdraft facility is a type of credit extension offered by banks that allows a borrower to withdraw money even when their account balance is zero. A business overdraft works in a similar fashion, except that in this case it is a business account. 

In some cases, a company may prefer a business overdraft over a conventional business loan (especially when the capital requirement is not major) as in the former case you only have to pay interest on the overdraft balance.

Invoice Financing

In some business transactions, when a business sells a good or service to a customer, it provides the buyer with an invoice stipulating a window to complete the payment. However, if the business in question cannot wait until the end of this period (that is, it is urgently in need of capital), then the business can approach a third party that buys the invoice and provides the business with some part of the money involved in that invoice (up to 95%). Finally, when the customer at the end of the period remit  their final payment, the balance of the invoice issent back to the business, minus the service fee that is charged by the third-party financing company.

Conclusion

There are various business loan instruments available in India, each of them tailored to meet specific needs. Before applying for a business loan, make sure you thoroughly research all lenders in the market so that you can secure the best deal possible. Also go through the loan’s terms and conditions properly so that any unforeseen expenses don’t catch up with you.

Frequently Asked Questions (FAQs)