Types of Business Loans in India

Starting a new business is not easy. You would have to manage several things, from having a solid business loan to hiring the best employees, taking care of the daily operation, complying with legal procedures and formalities, and so much more. Not to mention, the business requires sufficient financial support at different stages.

 

So, if you are planning to start a small business or run one in India, you can rely on getting a business loan to obtain the desired funds. It is the most efficient means of obtaining business capital, and it comes with several benefits, like tax advantages.

 

Today, many lenders in India offers different types of business loan to suit the needs of different business owners. Each of the business loan types serve different purpose. So, as a business owner, you must know about the different loan types and choose the right one to suit your specific needs.

 

Term Loan

 

A term loan is one of the most common types of business loans in India. It is the best form of credit to avail, especially if you are starting a new business or just started one and need capital to keep the operations running.

 

Today, many financial organisations in India offer this type of business loan. With terms loans, you can borrow the amount for a predetermined period, which is fixed at the time of borrowing the loan and at a fixed rate of interest.

 

Generally, lenders in India offer three types of business loans—short, intermediate, and long—based on the repayment period. The tenure of these loans varies from 12 months to 60 months, based on the lender you choose to borrow from.

 

The best thing about getting a term business loan is that you can use the money for any purpose you want; lenders usually don’t restrict the end usage of the funds. You can use it for buying new machinery, paying office rent or employees’ salaries, purchasing a business asset, etc.

 

Also, the interest rate for a term loan is generally quite affordable since it is a secured loan. This means you would have to pledge an asset with the lender against the amount you borrow.

 

Overdraft

 

Overdraft is a short-term business loan facility offered by banks and NBFCs. It allows you to withdraw more funds than the actual balance in your account and use the money for business purposes. However, you must know that the overdraft is a secured business loan, and you must provide collateral.

 

Also, with an overdraft business loan, you can borrow only up to a predetermined limit set by the lender. One of the advantages of getting an overdraft is that lenders charge interest only on the amount you use, not on the entire amount that you borrow or withdraw. This makes repaying the loan easy.

 

In addition, with an overdraft facility, the lenders do not restrict how you use the funds. So, in a nutshell, it is a great way to mitigate cash flow fluctuation or meet immediate cash requirements for your business.

 

Cash Credit

 

This is another popular business type available in India. Many business owners opt for a cash credit to raise working capital for their small businesses. Just like an overdraft, when you opt for a cash credit, you can withdraw more funds from your account than the actual balance up to a specific limit determined by the lender.

 

Generally, in this arrangement, the lenders determine your withdrawal limit based on critical factors. One, the working capital you currently have in your business, and two, the financial projection of your business in the future. Also, like overdraft, in cash credit, you would have to pay the interest only on the amount you use.

 

This gives you the flexibility to use the money you want and keep your business running as usual.

 

Startup loan

 

Another popular type of business loan is the startup loan. As the name says, it is a credit that specifically caters to the financial needs of entrepreneurs who own a startup business.

 

In this type of loan, you can borrow funds from any lender of your choice and bring your business idea to life. In other words, this loan allows you to make your dreams of being a business owner a reality.

 

You can use the funds to buy the machinery or equipment you need for the business, for marketing purposes, and for other expenses involved in growing your business and taking it to the next level.

 

Letter of credit

 

A letter of credit, or LC, as it is popularly known, is a financial instrument that financial organisations issue to business owners who trade across borders or carry out international transactions. In this arrangement, the lenders guarantee payment to your supplier or vendor on your behalf.

 

A letter of credit is a great way to run your business smoothly without any financial hassles. It reduces the risk for both you and the other party located in a foreign country. They have the assurance that their investment or their interest is protected since the lender takes the onus of repaying them on your behalf.

 

Unsecured Loan

 

If you are looking for a long-term business loan, applying for an unsecured loan could be an ideal choice, especially if you own a small or medium-sized enterprise and don’t have any assets to pledge. In this type of loan, you don’t have to provide any collateral to the lender against the funds you borrow.

 

Lenders generally approve this type of loan based on your personal and business creditworthiness, and business’ financial standing. Generally, the lenders offer this loan for a maximum period of up to 5 years. So, ensure that you have a sound repayment strategy in place before you avail of the credit so that you can easily repay the amount on time and consistently.

 

Final Word

 

So, there you go. There are different ways for you to get funds for your business. If you are an SME owner and are looking for a reliable funding option, you can apply for a small business loan with Udyog Plus, which is part of Aditya Birla Finance Limited. You can get the funds at the most affordable interest rates, with minimal documents, and also get repayment flexibility.