Business loans are unsecured financial assistance provided by banks and NBFCs in India. The primary aim of these is to support the urgent needs of your growing business. Most financial institutions offer term-loans and flexi-loans to cater to the business needs of a company.
10 Major Types of Business Loan in India – Purpose, and Basic Features
Here are 10 different types of business loans available for entrepreneurs in India.
1. Term Loan – 6 Basic Features of Term Loan
- The most common type of business finance.
- Could be secured or unsecured in nature.
- Amount available depends on the business’s credit history.
- Tenure fixed, ranging between
- 1 and 5 years if unsecured, or
- 15 – 20 years if secured
- Generally for capital expenditure.
- Lump-sum amount.
2. Start-up Loan – 3 Basic Features of Start-up Loan
- For new business ventures.
- Based mainly on the
- Borrower’s personal creditworthiness
- Current turnover figures and other financials
- Proof of the business existence and registration a basic requirement
3. Working Capital Loan – 3 things to know about Working Capital Loans
- Small business loans
- Most useful when
- There is a shortage of cash to carry out day-to-day activities
- There is a seasonal dip in business
- There is high demand esp during peak season
- Mostly applied by manufacturers and others engaged in seasonal products and services
4. Loan against Property for Small and Medium Enterprise (SME) – 4 Facts about Loan against property for SMEs
- Mainly for larger loan requirements such as loan amounts in excess of Rs. 50 lakhs.
- The applicant has to mortgage his/her property to avail of the loan.
- Property can be personal or commercial
- Property should be free of litigation
- Finance available for up to 70% of the current market value of the property.
- Tenure usually up to 15 – 20 years.
5. Invoice Financing – 5 things to know about Invoice financing
- Better known as invoice discounting or invoice factoring.
- Best suited for small businesses
- Financing the time gap between bills sent and payment received from the customers.
- Secured against the invoice/bill
- Financing available for up to 80% of the invoice amount.
6. Equipment Financing – 3 points to remember about Equipment Financing
- Mainly opted for by the manufacturing businesses to finance the purchase of expensive machines required for operation.
- The loan is secured against the equipment purchased.
- Since it is a secured loan, the interest rates could be lower than those on term loans.
7. Business Loan for Women – 3 major advantages of Business Loan for Women
- special schemes on a business loan for women entrepreneurs.
- The advantage includes
- Greater flexibility in the loan amount,
- discount on the standard interest rates, and
- quicker loan processing
8. Overdraft – 4 primary factors overdraft is based on
- provided against securities or collateral, especially fixed deposits with the lender
- Based on
- borrower’s credit history,
- relationship with the institution,
- business cash flow and
- Past repayment history
- Interest is charged only on the amount actually withdrawn.
- Tenure – as long as the principal and the interest amount are repaid as scheduled.
9. Merchant Cash Advance – 3 basic facts of Merchant Cash Advance
- An advance of capital on a portion of daily debit card sales or credit.
- The borrower has to then repay the advance with a portion of the daily credit sales.
- Repayment is expected as per the daily sales
- Slow business-> low amount to be repaid
- Business takes on -> repayment managed easily
10. Business Credit Card – 3 best benefits of Business Credit Card
- ideal for a short-term and immediate funding option.
- best benefit –
- rewards against payments done on debt
- introductory cashback on spends
- protection/insurance cover, etc.
- interest rates could be higher than traditional business loans.
Impact of Credit Score on Interest Rate of Business Loan
In the case of small businesses especially sole proprietary and partnership firms, a personal credit score equates business credit score. The lenders evaluate the credit profile of business owners while considering the loan application.
In India, credit scores provided by bureaus like TransUnion CIBIL, Equifax, Experian, and CRIF Highmark range from 300 to 900.
A credit score is a metric of one’s creditworthiness. It reflects how prompt one has been with repayment of debt and thus forms the base while calculating the propensity of default in the future. To avail credit at favourable terms, tracking credit score and working on improving it is essential.
Greater Negotiation Power with a Credit Score of 750-900:
With a credit score of 750+ one can not just get a business loan approval easily, but also demand lower interest rates and longer tenure. The lenders are highly likely to accommodate these demands since the repayment is assured.
Get a Business Loan on the Lender’s Terms with a Credit Score of 650-749:
A credit score of 650+ makes loan approval highly probable. However, one loses the power to negotiate loan terms. The loan received might be at a higher than the desired rate of interest. If there is no urgent requirement of the credit, one must consider delaying the procurement of credit and work on improving the credit score.
Take Steps to Increase the Credit Score from below 650 level and be Eligible for a Business Loan:
With a credit score lower than 650, there is a high chance of rejection of loan application. This would affect the credit score negatively. Even if the loan is approved, the interest rate demanded by the borrower will be high considering the risk perceived. It would be thus wise to take steps to improve one’s credit score and bring it above 650, before applying for a loan.
Keeping a track of your credit score and working on improving it is a great way of ensuring easy access to credit as and when required. Applying for a secured loan or having someone with a good credit score co-sign the loan application, improves the chances of loan approval.
In case of any further queries related to business funding, feel free to get in touch with our credit advisors for a free consultation.
