A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. There are a number of different types of business loans, including bank loans, mezzanine financing, asset-based financing, invoice financing, microloans, business cash advances, and cash flow loans.
Different types of business loans that you can go for:
Business needs are different and this means when you are looking to raise debt, there can be a range of options available to you. We list a few types of loans that you can consider when looking for money. The list is not exhaustive but should give you a fair idea about the choices.
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Working Capital Loan
The working capital loan is one taken to overcome the short-term shortage of cash. This is generally used to when cash in the business is not enough to take care of the day-to-day operations of the company. The working capital loan is a great way to overcome the seasonal shortfall of cash, irregular cash flow or to cater to a sudden spurt in business. A manufacturer, service provider, retailer/wholesaler or a trader engaged in imports/exports can apply for working capital loans. Working capital loans are generally in the range of 6-12 months and interest rates depend on the credit assessment of the firm but can depend anywhere between 12-16%. Banks generally ask for collaterals, but new age financial companies have been known to provide collateral-free loans. Collateral can be anything like residential, commercial, industrial property, or even shares, stock, book-debts, and gold. Credit facility under a working capital loan is generally around Rs 25 lakh and one can expect processing and renewal fees to be associated with such loans.
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Term Loan
These are standard loans where you apply for credit for a specific purpose and get a lump sum amount. These are long-term in nature and often utilized for capital expenditure. The tenure is fixed, the amount of loan available is generally higher and depending on the credit profile of the business, the rate of interest can be lower. Lenders prefer term loans to be backed by collateral, but in some cases, it can be unsecured in nature
Terms loan can range between 5 to 20 years and can have fixed or variable interest rates. Such credit will appear in your books of accounts as debt and you will need to show why you want the loan, your financial projections, and your repayment capability.
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Equipment Financing Loans
These types of loans are predominantly for the manufacturing businesses. Equipment can be costly but can be crucial for the operation and expansion of a business. To purchase equipment, most banks have specialized loan products to meet this need and tends to be at the upper limit of Rs 25 crore. However, some banks are known to have equipment financing products for as high as Rs 100 crore. The tenure for such loans are fixed and maybe in the range of 4-5 years, interest rates can be lower than term deposits and the equipment is generally taken as collateral, along with some additional security. Most banks offer manufacturing equipment loans, but banks also have specialized product around construction equipment loan. IT and office equipment and healthcare equipment loans are also provided by banks.