Business needs differ from one firm to another, and it means when you are looking to raise debt, there is a range of options available for you.
Here’s a list of different types of business loans.
The list is not meticulous; however, you should give you a fair idea about the choices.
Working Capital Loans
Businessmen avail a working capital loan mainly to overcome the short-term shortage of cash. When cash in the business is not sufficient to handle the day-to-day operations of the company, then the entrepreneurs will make use of these loans.
Working capital loans are an excellent way to cross the shortfall of cash during a certain period or to cater to a sudden spout in business. Traders engaged in imports/exports, manufacturers, service provider, retailer/wholesaler or a can apply for working capital loans.
Working capital loans generally range from 6-12 months, and rate of interest depending on the credit assessment of the firm and it may be anywhere between 12-16%. Banks usually ask for collaterals, but new-age financial companies are known to deliver collateral-free loans. If you’re opting for collateral-based loans, you can submit any kind of assets like a commercial, industrial property, residential, book-debts, gold or even shares and stock. Under a working capital loan, the credit facility is generally around Rs 25 lakh and the processing, renewal fees to be associated with such investments.
Some types of working capital loan include an Overdraft/ business line of credit, cash credit, Post Shipment Finance and Packing Credit. There are additional modes of working capital loans, mainly for the export community, like Letter of Credit (LC), nevertheless, the RBI has banned the Letter of Undertaking.
At the same time, the line of credit is prevalent where a business has a certain amount of fund that one can keep it with them, and it can also remain selected in a rotating manner.
Working capital loans are much like a credit card where you can borrow loans for a specified time and after paying the interest. The rate of interest on the line of credit is lesser but can go up if you fail to repay within a specified period.
These are standard loans where you can apply for credit for a particular purpose and get a lump sum of amount. These are long-term in nature and often used for capital expenditure. The applicant chooses the tenure, the available amount of loan is generally higher, and be contingent on the loan business profile, the interest rates can be lesser. Lenders can prefer term loans that can be backed by collateral and it can be unsecured in nature in some cases.
Terms loans will range between 5 to 20 years and will have fixed or variable interest rates. Such credit will appear on your books of accounts as debt, and you have to show why you want the loan, your repayment capability, and your financial projections.
These types of loans are predominantly for manufacturing business. Equipment may be costly but can be essential for the operation and expansion of a business. To purchase equipment, most banks and NBFCs offer specialized loan products to handle these requirements and inclines to be at the higher limit of Rs 25 crore.
Yet, certain banks are known to have equipment financing products for as high as Rs 100 crore. The tenure for such loans ranges between 4-5 years, and the choice of preference is up to the applicant. Interest rates can be lesser than term deposits, and customers can avail the equipment loan as a collateral loan, along with some additional security.
Most financial institutions offer manufacturing equipment loans, but NBFCs also have specialized products around construction equipment loans. Banks also provide IT and office equipment and healthcare equipment loans.
Invoice financing and discounting is a powerful tool to raise capital funds. It provides an excellent way for small businesses to find working capital funds. There is often a time lag when a firm raises an invoice until the amount finally gets paid. During those situations, you can approach a bank or a financial institution to provide you with a loan against the invoice. When you pay the full invoice amount, then you will get 80 per cent as the loan amount, and the remaining becomes a due.
The lender will subtract the processing fee and interest, from this amount, which is generally very low.
RXIL (Receivables Exchange of India Ltd), a joint venture promoted by SIDBI (Small Industries Development Bank of India) and NSE (National Stock Exchange of India Limited), is an excellent way to get your finances. get ready to register your company on those platforms, if you’re a small business owner.
Pradhan Mantri Mudra Yojana (PMMY)
Pradhan Mantri MUDRA Yojana (PMMY) is a structure precisely for the MSME industry in the non-farm sector. Financial institutions such as Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs offer these loans. There are three categories of loans available under this scheme – Shishu, Kishore and Tarun to denote the phase of growth/development and the funding needs of the company.
- Shishu covers up to Rs 50,000 for a loan.
- Kishore covers Rs. 50,000 to Rs 5 lakh.
- Tarun covers loans between Rs 5 lakh up to Rs. 10 lakh
The loan can be useful to buy a Two-wheeler loan, loan for working capital requirement, commercial vehicle, car loan, buying plant and machinery, renovating offices etc. Collateral is not required under this scheme.
Stand Up India
This scheme is mainly for entrepreneurs of the Scheduled Tribe (ST) or Scheduled Caste (SC) and Woman borrowers can set up a venture (not meant for enterprises which have already started operations). In the case of non-individual business, at least 51% of the shareholding and controlling stake should be under the control of either a Woman entrepreneur or SC/ST.
Banks and NBFCs provide collateral of Credit Guarantee backed loan and it may be anything from an office equipment loan to commercial vehicle loan. Loans can range between Rs 10 lakh to Rs 1 crore and made available under this scheme.
I am Pramit Mitra, a doctor-to-be with a creative instinct and a tenacious spirit.
A connoisseur of taste, a part-time food blogger with tremendous curiosity and appetite for new and unknown cuisines. I love to express myself through writing. I’m always in search of new ideas to enact and new avenues to explore.