There are many different reasons you might need a business loan. Whether it is to start, run, or expand your business, there is a need for timely funding so that you can operate smoothly. Not all businesses work the same way, and this is why it is important to have a variety of options for financing that address different business situations. The differences in business loans come about because of the loan duration, type of interest, borrowing amount, and flexibility of the loan.
There are two types of business loans taken in India:
1. Fund Based
2. Non-Fund Based Credit Facilities
Fund-based credit facilities are those where the actual outflow of funds from the bank to the borrower is approved, whereas non-fund facilities are those at the time of the penalty which does not require any outflow of the bank’s funds. Typical examples of fund-based facilities include term loans, cash loans, and overdrafts, and non-funded facilities include letters of credit, bank guarantees, letters of comfort, etc. Non-fund based facility may turn into a fund based facility on the due date/event of the defined event, such as the transfer of bills under the LC, the invocation of the bank guarantee, etc.
- TERM LOAN
A term loan is one of the most common forms of corporate finance. In nature, the loan may be secured or unsecured. This amount depends on the credit history of the company. The term is set, varying from 1 to 5 years if not guaranteed, or for secured business loans for up to 15 to 20 years. A term loan is usually for capital investment for a particular reason. The lender disburses the approved fund in a lump sum amount.
- START-UP LOAN
Start-up loans are for new business ventures. Applicants for such loans may not have a long history of credit at their company due to a lack of vintage industry. Thus, to judge the eligibility of the business loan, the lender may take into account the personal credit profile of the borrower along with that of the company. Current turnover figures and other financial statements are also considered to determine the amount of the loan, the duration, and the interest rate applicable. The business should be formed, and the applicant must submit proof of the business existence and registration.
- WORKING CAPITAL LOAN
Businesses need to have a sufficient and constant cash flow in order to retain good short-term liquidity. This is where a working capital loan comes in handy. Meets short-term business needs such as inventory and payroll expenses, handles late payments from debtors, and more with a working capital loan up to Rs.20 lakh.
- EQUIPMENT FINANCING
It is the production firm that normally prefers to fund equipment or machinery. Production units need expensive equipment for their business to operate. And machinery financing is the most favored one to buy the machines, out of all kinds of company loans. This is due to the particular nature of the machinery loans under which the equipment under question and some other security are taken as collateral. Temporary deposit interest rates can be lower than that imposed.
- MACHINERY LOANS
Whether it is the purchase or upgrade of plant & equipment, companies would need significant funding in all circumstances. Machinery Loans are one of the forms of business financing that provides liquidity to meet fixed asset needs.
- INVOICE FINANCING
Invoice financing is also known as invoice discounting or invoice factoring. This type of funding is especially suitable for small companies who have a delay between the facts being raised and the payment received from customers. Funds are issued by the financial institution against the amount raised in the invoice. Up to 80% of the invoice can be financed by the lender. Once the company gets paid, it cancels out the debt as per the determined tenure and interest rate.
- LETTER OF CREDIT
Most commonly used in the import/export business, a letter of credit is a guarantee offered by a bank that the seller will receive payment when certain conditions are met. The bank will make the payment to the seller even if the buyer is not able to pay.
- BANK GUARANTEE
This is a service provided by banks where they promise to pay off the liabilities of a debtor if the debtor does not meet contractual obligations. There are different types of bank guarantees that cover different situations.
- Advance Payment Guarantee
- Financial Guarantee
- Bid Bond Guarantee
- Deferred Payment Guarantee
- Foreign Bank Guarantee
- Performance Guarantee
It is advisable to select a business loan based on your business profile and requirement. The information provided above will help you to decide the type of funding that best suits your business as a business owner. Also, there are many other such types of Business Loans: Secured and unsecured Loans.