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

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.

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.

5. Overdraft Facility

Overdraft, or OD, is a credit facility that allows you to withdraw funds from your current account even if it has no balance. OD is typically provided by banks and is granted for a limited time. This credit facility has a predetermined limit that is decided based on your credit history, transaction history, and revenue. OD is a secured form of business financing and is provided against property, insurance, salary, equity, and investment. 

Features of OD

• You can get the loan if you have a good relationship with your financial institution.
• Interest is charged on funds withdrawn from your account that exceed the available account balance.
• OD offers a joint loan facility.

6. Medical Equipment Finance

Medical science is advancing at a rapid pace. The approach to medical assessment and treatment has changed dramatically. If you own a hospital or a small clinic, you must ensure that your equipment is upgraded regularly. However, given the costs, purchasing it with your own money is not advised, and you should seek medical equipment financing.

Features of Medical Equipment Finance

• Medical equipment finance is available for an amount ranging from Rs 10 lakhs to Rs 2 crores.
• You can repay your loan within seven years from the date of disbursement.
• The interest rate starts from 11% and is decided based on your business profile and credit behaviour. 
• You can use the funds to buy an X-ray, CT scan, and dialysis machine. 

7. Government Business Loan Schemes

Established financial institutions often hesitate to lend to start-up profiles. The reason is a lack of business experience and credibility. Due to this scenario, businesses either close or raise funds through equity or angel investors in exchange for a majority stake in their company. In order to address this situation and make funds available to new and established businesses, the government began offering various financing schemes.

Some noted government business loan schemes are–

• Pradhan Mantri Mudra Yojana
• MSME Loan in 59 Minutes
• National Small Industries Corporation Subsidy
• Credit Guarantee Fund Scheme for Micro and Small Enterprises
• Make in India Soft Loan Fund for MSMEs
• Stand-Up India Scheme

8. Merchant Cash Advance

In the digital age, transactions through credit and debit cards are very common. Given this, various shops and stores have started installing point of sale (POS) machines to allow customers make payment through card swiping. Merchant cash advance is a business loan product in which you can receive cash advance based on the card transactions. 

The repayment model is determined by reviewing your daily collection via the swipe machine installed in the store. The fixed portion, also known as the holdback percentage, of your daily collection is automatically credited to your lender's account.

Features of a merchant cash advance: 

• This loan is only available if your store has a POS machine. Moreover, the lender requires you to furnish a POS statement issued by the bank to determine your eligibility.
• This loan requires no additional security. If the lender so desires, they will place a charge on your POS system bank credit.
• This financing product usually has a higher business loan interest rate. 

To Conclude

In order to carry out your business activities smoothly, you need to be aware of the different types of business financing and understand the different options of financing available for you. This will help you go for the loan that best suits your needs. We suggest here that before you proceed with your application, assess your requirements, evaluate the available loan products, and review the eligibility and documentation.