What are the different types of Business Loans available in India?

Regardless of your company's size or the nature of its operations, the need for additional capital can arise at any time. Additional funding can be for anything, such as investing in a startup, purchasing a new office, or stocking inventories. And, to assist you in this regard, business loans are readily available in the market. However, every business is unique, as are its requirements. Given this, financial institutions provide customised funding options tailored to specific needs. Let's learn about these products one by one.
 

Types of Business Loans in India

 

1. Term loans

   Term loans are a popular type of business financing. They are unsecured and are preferred by entrepreneurs when they require funds quickly to meet short-term expenses. Because of the loan's flexibility, you can use funds for several purposes, such as paying staff salaries, stocking raw materials, and purchasing equipment. The term loan is disbursed after reviewing your company's credibility, annual profit, cash flow status, and experience as an owner in running that specific company.
    

   Features of term loan:

   • You can get maximum funding of Rs 25,00,000 under this loan product. 
   • A term loan is available with a maximum payback period of 36 months. Though the lender provides repayment flexibility, you can choose the tenure depending on your budget.
   • Most financial institutions require business owners to have at least five years of experience running the company for which they are applying for a loan.
    

2. Working Capital Loan

   Your company may experience liquidity issues in meeting its daily operational expenses. Such problems are more likely if your business is highly seasonal or your sales are cyclical. A working capital loan is a type of secured business financing product designed to address such challenges. You can secure funding through this product by pledging your company's underlying inventories. 
    
   Most businesses use this product to cover costs, such as rent, raw materials, payroll, and short-term debt repayment.
    

   Features and eligibility requirements of working capital loan

   • You can get maximum funding of Rs 5 crore under this loan product. In terms of loan-to-value (LTV), you can borrow up to 80% of the value of the pledged assets.
   • It comes with a flexible payback tenure of 36 months. 
   • A minimum of five years of total business experience, with three years of experience in an existing company, is necessary to secure this loan.
   • Audited financial statements, KYC and crucial details of all directors and partners, and a business registration certificate are some vital documents mandatory for working capital loan approval.

Also Read: Why Working Capital Loan is the Best Funding Option?
 

3. Letter of Credit

   A letter of credit, or LC, is an official document issued by a financial institution on your behalf. The document states that the payment to the seller is guaranteed and that there is no default risk. In case you fail to make the payment, the financial institution will be held liable.
    
   LC is a secured form of financing. It is generally offered by banking institutions by pledging cash in the account or securities. Additionally, you must pay a fee based on the coverage amount specified in the letter. The parties involved in this transaction are the financial institution, you, and the seller.
    

   Four types of LC are outlined below.

   • Sight credit:

     Sight Credit LC offers on-the-spot funding in exchange for the required documents. For example, you can obtain funds by submitting a bill of exchange with sight LC to your lender.
      

   • Time credit:

     Under this, the bills are accepted once they are presented, and payment is made on the due date specified on it.
      

   • Revocable/Irrevocable credit:

     If you have revocable credit, the issuer can terminate the terms and conditions on legitimate grounds. Irrevocable credit is the absolute opposite of it.
      

   • Back-to-back credit:

     If you receive LC from a client abroad, you may approach your lender and request that a new LC is issued in the name of your domestic supplier based on the export LC. If your lender agrees and provides this document, the LC will be referred to as back-to-back credit. 
      

4. Bill/Invoice Discounting

   Invoice discounting is a financing method in which you sell your account receivables (invoices) to lending institutions and receive funds in exchange. The funds can then be used to meet short-term working capital needs, such as purchasing raw materials and paying suppliers.
    
   Bill discounting is usually of three types:
   • Confidential bill discounting
   • Selective invoice discounting
   • Whole turnover bill discounting

   
   Features of bill discounting

   • The lender will fund up to 80% of the account receivables you have submitted to them.
   • The maximum tenure for which bill discounting finance is issued is 120 days.
   • The interest rate charged is decided based on the documentation, profitability, and the business vintage. The rate is typically between 11% and 14%.
   • Documents necessary for this loan approval include a shareholding pattern, two years of ITR, business projection (sales and revenue for one year), and three years of audited financials. 

 
Also Read: What Is Bill Discounting And Why You Should Use It For Better Cash Flow?