Business Loan Types in India Explained for MSMEs and Startups

Running a business in India’s dynamic economy requires not just a vision but also the right fuel capital. Whether you are a budding entrepreneur seeking seed capital or an established SME owner looking to scale, the Indian financial landscape offers a plethora of credit options. Understanding the various business loan types is critical to ensuring that you select a product that aligns with your cash flow and long-term objectives. As a regulated NBFC, Hero FinCorp emphasizes that selecting the right credit instrument is vital for maintaining a healthy Debt Service Coverage Ratio (DSCR), which lenders use to assess your ability to repay debt through operating income.

Types of Business Loans Available in India

1. Term Loans

Types of business loans often start with the traditional term loan, the most recognized form of business financing.

• Definition: A lump sum amount provided by a lender, which is repaid over a fixed period through Equated Monthly Installments (EMIs).
• Tenure: Typically ranges from 1 to 10 years, though some long-term loans can extend to 15 years depending on the asset's economic life.
• Purpose: Ideal for capital expenditures (CapEx) like purchasing machinery, land, or building a new office.
• Pros: Predictable repayment schedule and larger ticket sizes.
• Cons: Often requires collateral and has a longer approval cycle.

2. Working Capital Loans

Unlike term loans, different types of business loans like working capital credit are designed to manage short-term operational gaps.

• Purpose: To cover daily expenses such as payroll, rent, inventory, and supplier payments.
• Nature: Usually unsecured and offered for shorter tenures (6 to 48 months). Per RBI Master Directions 2025, these are strictly intended for the operating cycle and not for the creation of fixed assets.
• Flexibility: Disbursals are often faster, sometimes within 48 hours for fintech-enabled lenders.

3. Cash Credit and Overdraft Facilities

These are revolving business loan facilities, such as cash credit and overdraft, designed to offer maximum flexibility for short-term liquidity needs.

• Cash Credit (CC): A limit is set against the business's current assets (like stock or receivables); interest is only charged on the utilized amount.
• Overdraft (OD): Allows you to withdraw funds from your current account beyond the actual balance up to a pre-approved limit. Interest is calculated on a daily reducing balance basis, ensuring you only pay for what you use.

4. Invoice Discounting / Invoice Financing

If your capital is tied up in unpaid invoices, this facility, one of the more specialized types of business loans in India, unlocks that value immediately.

• How it works: A lender advances a percentage (usually 80-90%) of your outstanding invoices. Once the client pays, you receive the balance minus a small fee.
• Benefit: Zero debt on the balance sheet and immediate cash flow without waiting for 30-90 day payment cycles.

5. Equipment and Machinery Loans

Specifically tailored for industrial growth, these business loan types are "asset-backed."

• Collateral: The machinery itself acts as security, often negating the need for additional property collateral.
• Tax Benefits: Businesses can often claim a 15% depreciation rate on general plant and machinery under Section 32 of the Income Tax Act, reducing their overall tax liability.

6. Business Loan Against Property (LAP)

For businesses requiring substantial funds (multi-crore ticket sizes), Loan Against Property is the most cost-effective secured option.

• LTV (Loan to Value): Lenders typically offer up to 70% of the market value of the commercial or residential property.
• Tenure: Longest repayment periods, extending up to 15–20 years.

7. Merchant Cash Advance (POS Loans)

Ideal for retail and e-commerce businesses that have high volumes of daily card transactions.

• Repayment: Linked directly to your daily/weekly POS (Point of Sale) terminal sales.
• No Fixed EMI: You pay more during peak sales periods and less during slow business cycles.
• Speed: Fast approvals, often within 24 hours due to automated digital credit assessment as per the RBI Digital Lending Directions.

8. Government Schemes for Small Businesses (MSMEs)

The Government of India has launched several flagship schemes to promote financial inclusion in 2026:

• Pradhan Mantri Mudra Yojana (PMMY): As of 2025, the limit for Mudra loans has been enhanced to ₹20 Lakh under the new 'Tarun Plus' category for borrowers who have successfully repaid previous loans (Source: PIB/Ministry of Finance).
• Stand-Up India: Focuses on SC/ST and women entrepreneurs, providing loans between ₹10 Lakh and ₹1 Crore for greenfield projects.
• CGTMSE: The ceiling for collateral-free credit guarantees has been increased to ₹10 Crore as per the 2025-26 Union Budget to empower MSME scaling.
• PMEGP: A credit-linked subsidy scheme offering up to 35% subsidy for new manufacturing (up to ₹50 Lakh) or service (up to ₹20 Lakh) ventures.

How to Choose the Right Business Loan

Selecting a loan is a strategic decision. Consider these four pillars before applying:

1. Purpose: Are you buying a fixed asset (Term Loan) or managing monthly bills (Working Capital)?
2. Cost of Credit: Compare interest rates (12%-24% for unsecured vs. 8%-12% for secured) and hidden processing fees. Per RBI guidelines, always review the Key Fact Statement (KFS) which highlights the Annual Percentage Rate (APR).
3. Repayment Capacity: Use an EMI calculator to ensure your monthly cash inflow can comfortably cover the debt service.
4. Eligibility: Ensure your CIBIL score (ideally 700-750+ for optimal interest rates) and business vintage (typically 2-3 years) meet the lender's criteria.

Frequently Asked Questions (FAQs)

What Are The Different Types Of Business Loans Available For Startups?

Startups can explore unsecured business loans from NBFCs, Merchant Cash Advances if they have POS transactions, or specialized government schemes like the Startup India Seed Fund and Mudra Loans (Shishu category) which do not require extensive vintage.

Which Type Of Business Loan Is Best For Long-Term Expansion?

A Term Loan or a Business Loan Against Property (LAP) is best for long-term expansion. They offer higher loan amounts and longer tenures (up to 15-20 years), making EMIs more manageable for large-scale projects.

Can I Get A Business Loan Without Collateral In India?

Yes. You can opt for unsecured working capital loans, invoice discounting, or loans under government schemes like CGTMSE, where the government provides the guarantee instead of you providing physical collateral. The CGTMSE limit is now extended up to ₹10 Crore for eligible MSEs as per the 2026 Budget.

How Does A Merchant Cash Advance Differ From A Traditional Loan?

A traditional loan has a fixed monthly EMI regardless of your sales. In contrast, a Merchant Cash Advance (MCA) is repaid as a percentage of your daily sales; if your sales are low, your repayment for that period is lower, easing cash flow pressure.

What Are The Eligibility Criteria For A Business Loan In 2026?

Typically, you need a CIBIL score of 650-700+, a business vintage of at least 2 years, and a minimum annual turnover. You must also provide GST returns and audited financial statements for the last 12-24 months in compliance with RBI's "Know Your Customer" (KYC) norms.

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