What is a Business Loan?
The banks and non-bank financial companies in India provide unsecured business loans. The aim of these programs is to support business growth by addressing urgent business needs. To meet the business needs of a company, most financial institutions provide term loans and flexi loans. A commercial loan can also be referred to as a business loan. These loans can be acquired by all types of businesses, including sole proprietorships, partnerships, self-employed individuals, and retailers.
There are two ways you can receive a business loan from a bank. It includes either an unsecured funding arrangement or a secured funding arrangement. In order to obtain a secured loan, banks usually require collateral. A default on the loan will forfeit this collateral. It is likely that the bank will want to see the business’s financial statements, balance sheet, and business plan, and to study the credit histories of its principals.
Using a business loan, you can take care of things such as expanding your business, increasing production, taking your operation online, and buying new machinery. Your business can run smoothly if you have access to business finance. This is which allows you to quickly receive cash to make purchases and payments.
Whether you need to purchase new technology to equip the workforce, or you want to open a new store, easy Business Loans help you cover your expenses. Take advantage of Business Loan EMI options and extended loan terms offered by leading financial institutions and banks to manage your company’s cash flow.
Business loans in India are broadly classified into eight types:
1. Bill/Invoice Discounting: Basically, the purpose of bill and invoice discounting is to close the gap caused by late realization of invoiced payments. The purpose of invoice discounting is to take a loan only for unpaid invoices up to the next 90 days. While the purpose of bill discounting is to take a loan for bills due from 30 days to 120 days. Discounting invoices or bills is a great way to manage working capital needs and ensure smooth operations in a business. This feature is especially useful for companies with a limited cash reserve, like MSMEs and SMEs.
2. Equipment Finance or Machinery Loan: A machinery loan, also called equipment finance, is a form of financing available to borrowers who want to buy or upgrade machinery. The majority of businesses using equipment finance are large firms and manufacturing companies. Equipment loans can also offer tax benefits to owners of the companies. Each lender offers a different interest rate, loan amount, and repayment period.
3. Letter of Credit: Letter of credit generally refers to a funding guarantee provided by a bank or lender when a business is conducting international trade. Entrepreneurs can utilize letter of credit both for imports and exports. When doing business overseas, companies deal with suppliers they don’t know. So for this reason, they demand an assurance of payment before completing any transaction. Letters of credit are therefore crucial to suppliers because they guarantee payment.
4. Loans under Govt. schemes: A number of loan schemes have been designed by the Government of India to promote individuals, MSMEs, women entrepreneurs, and other companies in the trading, services, and manufacturing sectors. Under government schemes, loans are offered by various financial institutions. This includes private and public sector banks, non-banking financial companies, regional rural banks, microfinance institutions, small finance banks, etc. Among the top government loan schemes are Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 minutes, PMRY, etc.
5. Overdraft Facility: An overdraft facility allows a bank’s customers to withdraw cash from their accounts even if their accounts have no funds. The interest rate applies only to the amount withdrawn and is based on a daily basis. Account holders receive a credit limit based on their relationship with the bank, their credit history, their cash flow, as well as their repayment history. If you pay the interest on time, you can use the overdraft limit in any way you want. Each year there is a revision to this. Overdraft facilities are available against collateral or securities, especially in the form of fixed deposits with a bank.
6. POS Loans or Merchant Cash Advance: A POS (Point-of-Sale) Loan or Merchant Cash Advance is a structure where a business owner using his/her daily credit or debit card transactions pays a lump sum amount in advance to a supplier. Small businesses often encounter short-term cash problems. Therefore, merchants turn to POS loans to reduce liquidity constraints in their businesses. Comparatively, POS loans have a higher interest rate than other types of business loans. In retail shops, grocery stores, supermarkets and shopping malls, the repayment facility can be accessed through POS (Point of Sale) machines that process debit or credit transactions.
7. Term Loan (Short & Long-term Loan): It is a loan that must be repaid in regular installments over a set period of time. A term loan can be classified as short-term or long-term. These two types of loans have repayment terms ranging from 12 months to 10 years. Short-term loans are of a shorter duration, usually 12 months, while long-term loans are longer, generally up to 10 years. In terms of loan amount, the bank offers loan amounts between Rs. 1 lakh and Rs. 1 crore, or even more depending on the needs of the business. At the time of application for the loan, the lender will finalize the loan repayment schedule.
8. Working Capital Loan: Typically, working capital loans are used by businesses to cover their daily operational costs, such as buying machinery and equipment, managing cash flow, buying raw materials, enhancing inventory, and paying salaries. Generally, working capital loans have a repayment period of up to 12 months. The lender does not require collateral or security for this type of loan. This is a collateral-free loan. Due to a higher interest rate, it may cost a little more than a long-term loan or a general business loan. This type of loan is one where the bank sets a limit on the amount the business can borrow.
Having learned how to get a business loan in India, you must have a vague idea of what their features are. Access to business loans is easy and convenient with flexible EMIs and low-interest rates. You can choose the best business loan deal by comparing loan offers offered by various financial institutions, including private sector banks, public sector banks, NBFCs, regional rural banks, small finance institutions, and microfinance banks.
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