Business loans are an important source of financial support for small and large businesses alike. Whether you are starting a new business, expanding an existing one, or need funds to tide over a difficult phase, a business loan can be of great help. India offers a wide range of business loan options to cater to the diverse needs of businesses. In this article, we will take a look at the different types of business loans available in India.
1. Term Loans
A term loan is a type of loan that is meant for long-term financing and is repayable in equal installments over a fixed period. These loans can be used for a variety of purposes such as purchasing machinery, buying real estate, or expanding your business. Term loans are available from banks and financial institutions, and the repayment period can range from 1 to 10 years. The interest rate on term loans is usually fixed, but some lenders also offer floating interest rates.
2. Working Capital Loans
Working capital loans are meant for financing the day-to-day operations of a business. These loans are usually used to meet short-term financial requirements such as payment of salaries, purchasing raw materials, and paying bills. The loan amount is usually smaller compared to term loans and the repayment period is also shorter, ranging from 6 months to 1 year. The interest rate on working capital loans is usually higher compared to term loans.
3. Overdraft Loans
Overdraft loans are meant for businesses that need a flexible source of financing. The loan is linked to your current account, and you can withdraw up to the limit sanctioned by the lender. The interest is charged only on the amount you use, and not on the entire limit sanctioned. Overdraft loans are ideal for businesses with a fluctuating cash flow as they provide financing during lean periods. The interest rate on overdraft loans is usually higher compared to term loans.
4. Cash Credit Loans
Cash credit loans are similar to overdraft loans and are meant for financing the day-to-day operations of a business. The loan is linked to your current account and you can withdraw up to the limit sanctioned by the lender. The interest is charged only on the amount you use, and not on the entire limit sanctioned. Cash credit loans are ideal for businesses with a steady cash flow as they provide financing during lean periods. The interest rate on cash credit loans is usually higher compared to term loans.
5. Letter of Credit
A letter of credit is a guarantee issued by a bank on behalf of a borrower to a lender. It is usually used in international trade transactions where the buyer and seller are located in different countries. The letter of credit acts as a guarantee that the seller will receive a payment if the buyer fails to pay. The interest rate on a letter of credit is usually low as it is a guarantee and not a loan.
6. Bill Discounting
Bill discounting is a type of loan that is meant for financing short-term requirements of a business. The loan is given against post-dated cheques or bills that are issued by the borrower. The interest rate on bill discounting is usually higher compared to term loans. This type of loan is ideal for businesses that have a large number of bills that are yet to be paid.
7. Equipment Loans
Equipment loans are meant to finance the purchase of equipment or machinery. These loans are available from banks and financial institutions, and the repayment period can range from 1 to 10 years. The interest rate on equipment loans is usually fixed, but some lenders also offer floating interest rates. The loan amount is determined based on the value of the equipment that you are purchasing.
