Banks offer different types of lending to help businesses in various stages of growth. From day-to-day business operations to long-term business growth strategies, business loans can be helpful for several uses. However, banks consider the tenure of the business, patterns of cash flow, and credit history when they accept loan applications. Entrepreneurs should be aware of the different financial aspects related to loans, which may help them choose the right kind of business loan as per their needs. This article highlights some of the types of business loan options available and their uses.
Working Capital Loan
Working capital loans finance day-to-day business activities. This business loan facility assists firms in meeting recurring expenses such as buying raw materials, holding inventory, and disbursing employee salaries. The repayment period generally lasts up to 12 months, which indicates its short-term duration.
These loans are suitable for entrepreneurs, startups and MSMEs to increase their cash flow. Interest rates are often higher than long-term financing options. Moreover, lenders may establish specific limitations and restrict fund use to approved business purposes only.
Term Loan
Term loans provide structured funding that supports various business ideas through clear repayment schedules. These loans come in short-term and long-term options, which have a term often ranging from 12 months to 5 years or more.
Short-term loan options can be suitable for immediate business requirements and help to implement new business ideas quickly, while long-term options may support large expansion projects. Moreover, regular instalments are included in the repayment structure with terms finalised during the application process. This predictable repayment schedule may result in business planning.
Letter of Credit
Letters of credit facilitate international trade transactions. This business loan type provides payments to overseas suppliers, reducing transaction risks. Banks issue these instruments to support both import and export activities.
This financing option creates trust between trading partners who might not know each other. The bank guarantee ensures payment security, making international trade smoother. Businesses engaged in global commerce frequently use this instrument.
Bill Discounting
Bill discounting enables businesses to receive advance payments against their invoices at discounted rates. This business loan option improves cash flow by providing immediate access to funds. The discount represents the interest charged by the financial institution.
For instance, a Rs. 10 lakh invoice due in 45 days might be discounted to Rs. 9.5 lakh for immediate payment. The original payment terms with the customer remain unchanged, while the business may potentially gain faster access to working capital.
Overdraft Facility
Overdraft facilities allow account holders to withdraw beyond their balance limits. This flexible business loan option charges interest only on the utilised amount, which is calculated daily. Banks determine credit limits based on account relationships, credit history, and cash flow patterns.
Financial institutions typically secure overdrafts against fixed deposits or other collateral. The facility undergoes annual revision, providing continued access to funds. Regular interest payments maintain the credit line’s availability.
Equipment Finance
Equipment financing helps businesses acquire or upgrade machinery without substantial upfront costs. This business loan type particularly benefits manufacturing sector enterprises. The purchased equipment often serves as collateral, potentially leading to favourable terms.
Businesses may qualify for tax benefits when using equipment finance. The loan parameters, including amount and tenure, vary among lenders. This option helps companies maintain competitive advantages through modern equipment.
Government Scheme Loans
Various government initiatives provide specialised funding for different business segments. These business loans support MSMEs, women entrepreneurs, and specific industry sectors. Multiple financial institutions, including public sector banks, Non-Banking Financial Companies (NBFCs), and regional rural banks, participate in these schemes. These schemes often offer advantageous terms to promote business development. Each programme maintains specific eligibility criteria and funding limits.
POS Loans
Point-of-sale loans provide merchant cash advances based on card transaction volumes. This modern business loan option particularly suits retail businesses facing short-term cash requirements. Repayment occurs through future debit and credit card sales.
While interest rates exceed traditional loans, the flexible repayment structure may appeal to many merchants. This option proves particularly useful for retail shops, supermarkets, and similar firms using POS machines.
Project Finance
Project finance supports specific large-scale business initiatives or expansion plans. This type of business loan suits companies undertaking substantial infrastructure development, manufacturing units, or commercial property construction.
These loans feature structured disbursement schedules aligned with project milestones. The repayment terms often extend beyond five years, matching the project’s revenue generation timeline. Lenders require detailed project reports, including cost estimates and projected returns.
Conclusion
Each type of business loan serves specific financing needs with distinct features and requirements. Entrepreneurs should evaluate their business stage, cash flow patterns, and growth plans when selecting financing options. Comparing offers from various financial institutions, including banks, NBFCs, and specialised lenders, helps secure appropriate funding terms. Moreover, regular market research helps identify new lending products that may better suit evolving business needs. This knowledge enables informed decisions about using various types of business loans for different stages of business development.
