Want to Start Your Own Business? Know Details about Eight Types of Business Loans

Hyderabad: Nowadays many people prefer starting their own business to doing a job. But, doing business is not that easy and one has to face many ups and downs. Hence, if you want to start any business, you must consider all the consequences beforehand. Usually starting a business requires a lot of money. Therefore, many people try for bank loans. If you are also looking for a business loan? There are mainly eight types of business loans that are being offered in our country.

1) Working Capital Loan

Individuals, entrepreneurs, startups and MSMEs borrow working capital to meet their day-to-day business needs. This working capital loan is used for business expansion, improving cash flow, purchasing raw materials, building additional inventory/stocks, paying salaries and hiring staff. Working capital loans are mainly short-term loans. In India, working capital is given up to Rs 40 lakhs. It has to be paid in 12 months. This period can also be extended if necessary. Banks/NBFCs charge higher interest rates on these working capital loans as compared to long-term loans. But, this working capital has to be spent on the things specified by the bank.

2) Term Loan

A term loan is a loan that has to be repaid over a fixed period. The term loan is classified as short-term, intermediate and long-term loans. The repayment period of this term loan is 12 months to 5 years. Short-term loans have a duration of less than 12 months. Loans with a tenure of 5 years or more are called long-term loans. Collateral-free business loans up to Rs 2 crore can be granted depending on the business needs and this loan amount can also be increased. Lenders will finalise this term loan repayment period.

3) Letter of Credit

Letter of credit is a type of credit facility mainly used in international trade and commerce. Letter of credit is used by entrepreneurs for import and export business. Companies that do business with foreign countries usually deal with unknown companies or suppliers. Hence, they require payment assurance before conducting any transaction. For this, banks or credit institutions provide a letter of credit.

4) Bill Discounting

Bill or invoice discounting is a unique loan facility. For example, you want to take a loan of Rs 10 lakhs for 45 days from a bank. Then the bank deducts Rs 50,000 in advance and gives you Rs 9,50,000. That means they deduct the interest due to them in advance. You have to pay Rs 10 lakhs to the bank after the expiry of 45 days.

5) Overdraft Facility

Banks provide overdraft facilities to their customers. Using this, even if there is no balance in their account, they can withdraw money up to some limit. Interest is charged daily on this overdraft. Generally, the amount of this overdraft is decided based on the customer's relationship with the bank, credit history, money transaction and repayment capacity. The overdraft limit is revised every year. As long as the interest is paid on time, you can use the overdraft money as you like.

6) Equipment Finance/ Machinery Loan

Banks or lending institutions provide equipment finance or machinery loans to borrowers to purchase new equipment/machinery. Equipment finance is mainly used by large companies and manufacturing companies. This also gives them tax benefits. However, the interest rates, loan amount and repayment period vary depending on the lenders and borrowers.

7) Loans under Government Schemes

The Government of India introduced various schemes for individuals, MSMEs, women entrepreneurs and companies engaged in trade, services and manufacturing sectors. Public and private sector banks, NBFCs, Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs) and Small Finance Banks (SFBs) provide loans under government schemes.

Currently, the schemes offered by the Central government include the Mudra Scheme (PMMY), the Prime Minister’s Employment Generation Programme (PMEGP) and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Standup India, Startup India, PSB Loans in 59 Ministries and PMRY.

8) Point of Sale (POS) Loans: Retail shops, grocery stores and supermarkets.