Business, be it big or small, is in need of additional funds from time to time to meet day-to-day business requirements. The amount of cash required is also determined by the nature of the business: is it capital-intensive, and what stage of development it is in terms of genesis, growth, or maturity? Typically, a company's earliest phases and future growth require the most funding.
There are 8 different types of business loans which can be utilised by business owners -
1. Working Capital Loan
Working capital loans are used by businesses to cover their day-to-day expenses as well as for a variety of business expansion services, improving cash flow, buying raw materials, adding to their inventory or stock, paying salaries, employing personnel, etc. Working capital loans are often short-term loans with up to a 12-month repayment period. This loan is also known as a collateral-free loan. In contrast to long-term loans or other types of company loans, the interest rate given is a little higher.
2. Term Loan
A term loan is one that must be repaid in regular instalments over a certain time period. There are two types of term loans: short-term loans and long-term loans. The repayment period for these two types spans from 12 months to 5 years. Short-term loans have a tenure of no longer than one year, whereas long-term loans have a term of up to ten years.
3. Letter of credit
A letter of credit is a type of credit limit that is mostly utilised by trading companies when the bank or lender gives financial guarantees to businesses engaged in international commerce. Entrepreneurs can use letters of credit for both import and export transactions. Businesses operating internationally frequently work with unidentified suppliers; as a result, they need payment assurance before completing every transaction.
4. Bill Discounting
Bill or invoice discounting is a funding option where the lender gives the seller money up front at a reduced rate. This requires the buyer to contribute in the form of interest rate, in the form of interest paid and from the monthly fee in order to increase the revenue of the financial institutions.
5. Overdraft Facility
Overdraft facility is a funding type offered by a bank to its account holder to withdraw cash from his/her account even if the account balance is zero. Only the amount of the sanctioned limit that has been used is subject to interest charges, which are assessed daily. The sanctioned credit limit is determined by the account holder's history with the bank, including their relationship, credit history, cash flow, and, if applicable, payback history. When it comes to bank FDs, an overdraft facility is provided against securities or collateral.
6. Equipment Finance or Machinery Loan
The equipment finance or machinery loan is a funding choice made available to the borrowers so they can upgrade or buy new equipment or machinery. Large businesses and those in the manufacturing industry are the most common users of equipment finance. Enterprises or business owners availing equipment finance or machinery loan also enjoy tax benefits. Every lender will provide a different interest rate, loan size, and repayment period.
7. Loans under government schemes
The Indian government has launched a number of loan programmes to support people, MSMEs, women business owners, and other organisations operating in the manufacturing, service, and trade sectors. Various financial organisations, including commercial and public sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), etc., give loans through government programmes. Some of the most prominent government loan initiatives are the Mudra Scheme under PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB Loans in 59 Minutes, PMRY, and others.
8. Point-of-Sales (POS) Loans
POS Loans, also known as Merchant Cash Advances, are a system through which a business owner running an enterprise pays a lump sum amount in advance to suppliers via his or her daily or future credit or debit card transactions. Small business owners frequently run into a short-term liquidity problem. Therefore, retailers choose POS loans to lessen the business's financial crisis. In comparison to other business loan options, the interest rate offered by POS loans is somewhat greater.
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