What are the different types of Business Loans in India?

There are a lot of business loan options available in India, especially for SMEs for which funding can be one of the biggest hindrances in the growth of their business. You can easily apply for a Business Loan in Mumbai, Delhi, Indore, and other cities online. 

Working Capital Loan 

A working capital loan is taken to overcome the short-term shortage of cash. It is generally used when a business is not able to take care of its day-to-day operations. Working Capital Loan is a great way of overcome a sudden spurt in business, seasonal shortfall of cash and irregular cash flow. 

If you're a service provider, retailer, wholesaler, manufacturer or a trader who is engaged in imports and exports can apply for a Working Capital Loan. 

Equipment Financing 

Mostly meant for the manufacturing business, Equipment Financing Loans are taken to purchase equipments. To meet the need of buying costly equipments which are crucial for the operation of a business, banks have specialized loan products.  

Some banks also provide specialized products under construction equipment loan, IT and office equipment loan and healthcare equipment loans. 

Term Loans 

Term Loans are long-term loans of high amounts which are take for a specific need. They are mostly used to fulfill the capital expenditure of the business. Term Loans are always supported by collateral and can be extended for a fixed tenure. The interest rates are generally low in these loans. 

Term Loans can be both short-term and long-term. And the loan amount offered can range from Rs. 1 lakh to Rs. 1 crore.  

Invoice or Bill Financing 

Invoice Financing is the easiest way of infusing cash into your business using outstanding invoices. Instead of waiting for the client to pay the invoice amount, you can secure a loan against the unpaid bills with a tenure period equal to the invoice due date. The finance companies usually bear 80 to 85% of the invoice value of these bills.  

Bank Overdrafts 

Bank Overdraft Facility is a funding type which is offered by a bank to its account holders enabling them withdraw cash from their accounts even if the account balance is zero. The interest rate in this type of a loan is charged only on the utilized amount from the sanctioned limit. 

This credit limit depends on the account holder’s relationship with the bank, the credit history, cash flows and repayment history etc., if any. This overdraft limit is raised every year and can be used in any way. Overdraft facilities in banks are offered against securities and collaterals, especially in the terms of fixed deposits. 

Supplier Credit 

Trade Credit or Supplier Credit is a credit facility which is provided by the supplier of goods to the buyer. It simply means that the supplier sells the good on credit and you can pay for them later on. 

Letter of Credit 

Letter of Credit is a type of credit limit which is used by trading businesses in which the bank or lender provides a funding guarantee to enterprises which deal in international trade. Letter of Credit can be used in both import and export by entrepreneurs.  

Point-of-sale or POS Loans 

POS Loans or Merchant Cash Advance is a mechanism in which a business owner pays in advance a lump sum amount to the suppliers with his/her daily or future credit or debit card transactions. 

This approach is helpful for the merchants in reducing the liquidity crunch in the business. However, the interest rates offered under POS Loans are comparatively higher as compared to the other types of business loans.  

Business Credit Cards 

Not a Business Loan technically but Business Credit Cards can be used to finance and support your business. If you use a credit card specifically for your business needs, you can build business credit and then earn great rewards and cash backs on the business purchases that you make.  

Loans under Government Schemes 

The Indian Government has initiated various loan schemes to help and promote individuals and enterprises engaged in trading, services and manufacturing sectors. This includes MSMEs, women entrepreneurs and other entities. 

Some of the best Government Loan Schemes are Standup India, Startup India, and PSB Loans in 59 minutes, and Mudra Scheme under PMMY, PMEGP and PMRY etc. 

• CGTMSE PM SVANidhi 

CGTMSE or Credit Guarantee Fund Trust for Micro and Small Enterprises which is set up jointly by Ministry of MSME, Government of India and Small Industries Development Bank of India( SIDBI) catalyses the flow of institutional credit to Micro and Small Enterprises or MSEs.  

The Ministry of Housing and Urban Affairs (MoHUA), Government of India has also implemented a special scheme called “PM Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi. Its aim is to provide credit to Street Vendors. This scheme came into force very recently i.e. on July 02, 2020.  

• Pradhan Mantri Mudra Yojana( PMMY) 

Pradhan Mantri Mudra Yojana or PMMY is a scheme for the MSME Industry in the non-farm sector. The loans under this scheme are given by Commercial Banks, MFIs, NGFCs, RRBs, Cooperative Banks and Small Finance Banks.  

These loans are available under three products- Shishu, Kishore and Tarun according to the stage of development and funding needs of the enterprise. And the best part about this scheme is that you do not need collateral to take these loans. 

• Stand Up India 

The scheme Stand up India is specifically targeted at the entrepreneurs from the Scheduled Castes or SC, Scheduled Tribes or ST and Women Borrowers who want to set up a venture.  

For a non-individual enterprise to be eligible for taking a loan under this scheme, at least 51% of the shareholding and controlling stake should be of an SC/ST or a Woman Entrepreneur to be eligible for taking a loan under this scheme.  

Conclusion: 

Here’s hoping that the above-mentioned information has helped you decide on the type of financing which can be the best fit for your venture. Make sure that you select the Business Loan according to your own individual business profile requirements.