Things you will know after reading this article:
- What is a business loan?
- Types of business loan
- Detailed discussion of the types of loans
With each step we as a country take forward, we enter the globalized and competitive world. Such environment is motivating our youth to stand up on their own feet, get creative and build their dreams into something that they can call their own, and contribute in the development of our nation as a whole. To aid the start-ups and business, and help the self-employed youngsters there is a benefitting scheme, gaining popularity by each passing moment is the plan of a business loan. A business loan is very similar to any other loan, however it has few features exclusive to itself. Let’s discuss what is meant by a business loan:
In a Business loan, the lender basically provides the borrower with a capital to start or boost their business. The borrower has to pay the loan back in installments, within the tenure fixed, and the rate of interest applied. There are a number of types within a business loan.
Types of business loan:
- Secured- business loan can be secured if you back up the loan with a financial asset, or a personal asset as a collateral. The bank attaches a lien to your property and has the legal right to claim it when the borrower is unable to repay the loan, which is in the case of a defaulter. Availing a secured loan affects the rate of interest considerably, and the borrower may get a lower interest rate.
- Unsecured loan- a borrower can get an unsecured business loan too. However the rate of interest in this type is higher in comparison to a secured loan, as the bank is taking a risk by sanctioning an unsecured loan.
- Term Loan- One of the most common types of business finance is a term loan. The loan could be secured or unsecured in nature. The amount available depends on the business’s credit history. The tenure is fixed, ranging between 1 and 5 years if unsecured, or up to 15 – 20 years for secured business loans. A term loan is taken for a specific purpose, generally for capital expenditure.
- 2. Start-up Loan-A start-up loan is for new business ventures. Applicants for such loans may not have a great credit history on their company due to a lack of business vintage. Thus, to judge the business loan eligibility, the lender will take into account the borrower’s personal credit profile along with that of the company. The current turnover figures and other financials are also considered to decide the loan amount, tenure, and interest rate applicable.
- 3. Working Capital Loan-Working capital loans are types of small business loans taken to overcome the shortage of cash to operate a business on a day-to-day basis. It generates a balance in cash flow necessary to run a business. This loan is also helpful to deal with a shortfall of cash during the off-season or meet demand during a peak season. Most eligible applicants are service providers, manufacturers, wholesalers, retailers or traders engaged in exports and imports.
- 4. Loan against Property for SME-.Here, the applicant has to mortgage his/her property to avail of funds for business purposes. The borrower can apply for funds against either a residential or commercial property. Lenders can finance up to 70% of the current market value of the property. The title to the property should be clean and free from encumbrance. The mortgaged property should also be free of litigation. Tenure of such loans is up to 15 – 20 years, depending on the terms and conditions set by the lending institution.
- 5. Invoice Financing-Invoice financing is also known as invoice discounting or invoice factoring. This type of funding is especially for small businesses that encounter a time lag between raising invoices and receiving payment from the clients. The financial institution provides funds against the amount raised in the invoice. The lender can finance up to 80% of the invoice amount. Once the business receives the payment, it clears off the debt as per the decided tenure and interest rate.
- 6. Equipment Financing-It is the manufacturing businesses that usually opt for equipment financing or machinery loan. Manufacturing units require costly equipment for the operation of their business. And to purchase the machines, out of all the types of business loans, equipment financing is the most preferred one. This is because machinery loans are specific in nature, wherein the equipment in question is taken as collateral along with some other security. The interest rates could be lower than those charged on term deposits.
- 7. Business Loan for Women-Some of the financial institutions have special schemes on business loan for women entrepreneurs. Even the government of India has initiatives in place to encourage women in establishing small to medium-sized businesses. The advantage of specialized loans for women entrepreneurs includes a flexible loan amount, start-up loan, discount on the standard interest rates, and a faster loan process.
- 8. Overdraft-An overdraft facility is provided against securities or collateral, especially in terms of fixed deposits with the financial institution. The lender analyzes the borrower’s credit history, relationship with the institution, business cash flow and the repayment history before approving a certain fixed overdraft limit. The borrower can withdraw an amount required and pay interest only the utilized amount. The funds can be used in this manner as long as the principal and the interest amount are repaid as per the decided term.
A citizen of India, within the age group of 18-70 years can apply for a business loan. With the options listed above one can chose the best suited one, and can boost their business, or start off with the capital funds borrowed.