Broadly there are 8 Types of Business Loans in India:
- Term Loan (Short & Long-term Loan)
- POS Loans or Merchant Cash Advance
- Working Capital Loan
- Equipment Finance or Machinery Loan
- Overdraft Facility
- Bill/Invoice Discounting
- Letter of Credit
- Loans under Govt. schemes
To know more about Short Term Business Loans
Here’s a description of each type of business loan commonly available in India:
1. Working Capital Loan:
Working capital loans assist firms in controlling financial resources by financing short-term needs such as inventory purchases, paychecks, and rents. These are often short-term loans that don’t need security. Working capital loans are generally short-term, up to Rs. 40 lakh, with payback terms of 12 months or longer, depending on the company’s requirements. Banks and non-bank financial institutions often provide these at somewhat higher interest rates than long-term or general business loans.
2. Term Loan (Short & Long-term Loan):
Term loans offer companies a lump sum payment that is returned over a certain length of time, in addition to interest. The term loan is divided into three categories: short-term, intermediate-term, and long-term. Short-term loans are normally returned in a year, although long-term loans might last up to five years or longer. They are frequently utilized for growth, asset purchases, and large capital expenditures.
3. Letter of Credit:
In overseas trade, a letter of credit assures payment to a seller from the buyer’s bank. Entrepreneurs can use letters of credit to import and export. It ensures that exporters will be paid if certain conditions are met, lowering the risks associated with cross-border commerce.
4. Bill/Invoice Discounting:
This financing method enables firms to raise capital by selling outstanding invoices to a financial institution at a discounted price. The lender pays the firm a percentage of the invoice amount up front, with the remaining (less fees) due upon invoice settlement. For example, you sold items to Mr. Singh and obtained a 45-day letter of credit from his bank. If you want to retrieve the money before the 45 days, the bank will impose an interest or discount fee.
5. Overdraft Facility:
An overdraft allows businesses to withdraw more money than is available in their account, up to a set limit. This facility is flexible, letting businesses access funds as needed and pay interest only on the amount used, helping manage short-term cash needs.
6. Equipment Finance or Machinery Loan:
This loan specifically finances the purchase of equipment or machinery required for business operations. It allows businesses to acquire assets without large upfront costs, with repayment structured over the equipment’s lifespan.
7. Loans under Government Schemes:
To help companies, particularly small and medium-sized organizations, the government offers a variety of financing programs, including the MUDRA financing, Startup India, and MSME loan schemes. These plans frequently provide cheap interest rates, longer payback durations, and lower eligibility requirements.
8. POS Loans and Merchant Cash Advances:
These loans, which give cash advances based on future sales, are ideal for firms that generate a lot of money through point-of-sale (POS). Repayment is often a predetermined proportion of daily POS transactions, making it adaptable and suitable for firms with seasonal sales trends.
