What Are the Types of Business Loans?

Business, be it big or small, needs additional funds to meet day-to-day requirements. The funding also depends upon the company nature. Is it capital-intensive? What is its stage of development concerning inception, growth, or maturity? Usually, you need funds in the initial business set-up stages.

Banks are ready to offer a Business Loan to entrepreneurs, businesspeople, traders, and other independent workers to start, grow, and expand. Let us discuss the types in detail:

Working Capital Loan

Enterprises use working Capital Loans to meet their daily business requirements and for various business expansion services, enhancing business cash flow, purchasing raw materials, and inventory, paying salaries, hiring staff, etc. They are majorly short-term Loans in which the repayment tenure is up to 12 months. It is a collateral-free Loan with a higher interest rate.

Term Loan

Term Loan is repaid in regular payments over a set period and categorised into Short-Term and Long-Term Loans. The repayment term ranges between 12 months to five years.  The collateral-free Business Loans up to Rs. 1 crore can exceed depending on business requirements. The lender finalises the tenure at the time of application.

Loans Under Government Schemes

The Government of India has initiated various Loan schemes to promote individuals, MSMEs, women entrepreneurs, and other entities engaged in trading, services, and manufacturing sectors. Financial institutions, such as private and public sector banks, NBFCs, Regional Rural Banks, Micro Finance Institutions, Small Finance Banks, etc., offer them. For example, you can do MUDRA Loan online apply and expand your business according to your eligibility.

Letter of Credit

It is a type of credit limit used majorly in trading businesses in which the bank or lender provides funding guarantees to enterprises that deal in international trade. Entrepreneurs can utilise the Letter of Credit for import and export purposes and provide payment assurance to suppliers.

Machinery Loans

This type of Business Loan is a funding option offered to borrowers to help purchase new machinery for upgrading their processes. Large enterprises use this Loan to avail of tax benefits as well. The interest rate, amount, and repayment tenure vary between lenders.

Overdraft Facility

An overdraft facility is a funding type offered by a bank to its account holder to withdraw cash from their account even with a nil balance. Depending on the account holder’s banking relationship, credit history, cash flows, and repayment history, the bank charges the interest rate on the daily utilized amount from the sanctioned limit. You get an overdraft facility against collateral, especially FDs with the bank.

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