Business loans can be categorized into variegated types on the basis of the application of the funds that will be credited to the borrower’s account. It is highly essential for the borrower to understand and study the types and the business loan interest rate corresponding to it. This would allow the borrower to make the right choice of loan scheme which would strengthen their business framework. The variegated types of Business Loans are stated as follows:
A business owner can avail of a business overdraft only when they hold fixed deposits with the bank or financial institution. The lender analyses and verifies the applicant’s business repayment history, fixed deposit terms, cash flow, credit score, etc. to approve this loan. This facility allows the borrower to withdraw a greater sum than the amount present in their account as a loan to meet their business requirements. With the overdraft, the borrower can secure the required amount from the fixed deposit and pay interest only on the amount that is utilized. The maximum loan amount that can be withdrawn and the interest rate under this facility is dependent upon a mutual agreement between the banks and the borrower.
A term loan allows a borrower to avail a secured or unsecured loan to receive financial support according to the situation and necessities of the business. These loans aid in acquiring long-term assets like machinery, land, and building that would end up resulting in the exponential growth of your business and its profits. Mainly, there are three types of term loans that concern repayment tenure: short-term loan, long-term loan, and intermediate loan which can be reimbursed on a monthly or quarterly basis. Normally, in India, the tenor of repayment of such a loan is 2 to 10 years. The business loan interest rate for term loans is in accordance with the loan repayment tenure and can be fixed or floating.
In the case of a demand loan, after the borrower makes a withdrawal of a certain amount to meet the financial requirements of their business, the amount has to be repaid back whenever the bank or financial institution recalls it. Demand loans can be both secured and unsecured and are ideal to meet a short-term financial crisis. The borrower must ensure that they have the cash flow to manage the payments. The maximum repayment tenure for this type of business loan can be 12 months, though the borrower can choose to renew it when the term has ended.
Loans Against Securities
At the time of a monetary crisis, a business owner can also choose to opt for a loan against their financial securities. Not all financial securities can be pledged for a business loan, only those can be made to be collateral that are verified by the bank and are approved by the bank policy such as mutual funds, insurance policies, Demat shares, savings bonds, fixed maturity plans, exchange-traded funds, etc.
Letter of Credit to Facility
A letter of credit facility is a financing scheme where the bank guarantees that the seller will receive payment on certain conditions. If the buyer is unable to make the payment on the purchase, the bank will cover the outstanding amount. It can be availed by a business owner based on the creditworthiness of the buyer’s bank when the buyer and the seller do not know each other or operate in two different locations, such as during international or domestic trade transactions. The bank pledges on-time payment to the seller after taking into account its origin certificate, insurance certificate, legal documents, transportation documents, and commercial documents. However, if the buyer fails to make the payment, the bank is liable to pay the entire outstanding amount.
Cash Credit Facility
Cash credit facilities are loans granted in the form of overdrafts that can be appealed by a business owner. It is ideal to finance their need for working capital by pledging their current assets such as stock in trade, process, raw materials, receivables, inventory, etc. as collateral. Cash credit limits are based on drawing power which is arrived at after the deduction of the margin fixed by the bank over the stocks. The tenure of this loan can be renewed at regular intervals of 12 months.
You can avail this pre-approved secured loan by pledging residential, commercial, or industrial property as collateral. This financing scheme helps companies attain down loans, buy the necessary equipment, or cover any additional costs that will help the organization grow. The margin requirement is 20-100% based on the borrower’s profile. A Bank guarantee is a promise from a bank that the liabilities of a debtor will be met in the event that the debtor fails to meet up contractual obligations.
Loans for Female Entrepreneurs
To encourage women empowerment, numerous banks extend special loan schemes to existing and potential women entrepreneurs. These exclusive schemes offer a lot of benefits and discounts on interest rates, the quantum of loans, security, etc.
BENEFITS OF BUSINESS LOAN:
A business loan relies on variegated factors, valuation of the business, the amount of profit it makes annually, and the operating industry of the business in addition to the number of years it has been operational. The banks offer quick disbursal, working capital support and multiple loan options.
- It is convenient and easy. These loan applications have barely any hassle during processing. Therefore, quick approval. Most banks provide the borrowers with the promise of secured lending solutions.
- They offer flexible repayment plans coupled with minimal documentation; they have become one of the most preferred ways for businesses to meet their financial needs.
- They have reasonable interest rates. Unsecured business loans allow businesses to fund their exact exigencies and repay their loan amount in EMIs. These loans can be availed for a variety of reasons, including but not limited to, business expansions, working capital, etc.
- Banks also provide their customers with the comfort of doorstep service. Coupled with that, many business loan providers in India usually do not hope for any collateral, guarantor, or security from the borrower.
- Some financial institutions offer customers the provision of business loan eligibility in 1 minute, either online or offline. These easy and quick approvals ensure that customers don’t waste any time waiting for approval from banks or simply the status of their loan application.
- They come with the added benefit of services such as SMS, Phone Banking, Web Chat, etc. Some banks even offer exclusively higher loan amounts to their self-employed customers.
Thus, if you need financial resources for business needs, compare your options and apply for a business loan.