Whether it’s a small business, a big enterprise, or a startup, each commercial entity needs additional funds for smooth functioning and seizing growth opportunities. A business loan can help achieve planned goals, as well as help a business deal with unexpected circumstances. However, different businesses at different points in their lifecycle would require a unique kind of business loan based on their specific requirements. It is prudent to know which business loan type is right for you before you proceed to apply for the same.
What Are the Various Types of Business Loans?
Primarily, there are eight kinds of business loans available catering to the distinct financial needs of a business:
- Working Capital Loans
- Term Loans
- Letter of Credit
- Bill Discounting
- Overdraft Facility
- Equipment Finance
- Government Scheme Loans
- Point-of-Sale (POS) Loans
Identifying the Right Business Loan for You
Identifying the most suitable business loan hinges on a thorough assessment of your specific needs and financial circumstances. Begin by assessing the purpose of the loan – whether it’s for working capital, equipment acquisition, or expansion. Consider your business stage and cash flow patterns. Additionally, explore government schemes and special programs tailored for certain sectors. Consulting with financial advisors or loan experts can provide valuable insights for making an informed decision.
Different Business Loans & Their Benefits
In this guide, we’ll explore various types of business loans, each catering to distinct financial needs.
1. Working Capital Loan: Fueling Daily Operations
Working capital loans, tailored for individuals, entrepreneurs, startups, and MSMEs, bridge the gap in daily business requirements. These short-term business loans address needs like enhancing cash flow, purchasing raw materials, and covering operational costs. While interest rates may be slightly higher, they offer essential financial flexibility, allowing businesses to thrive.
2. Term Loan: Structured Repayment for Long-term Goals
Term loans can be categorized into short-term and long-term variants. This kind of business loan offers regular repayments over a predefined period. Short-term loans span 12 months, while long-term loans extend beyond five years. Certain lenders also offer a collateral-free option for this kind of business loan. The repayment tenure is determined at the loan application stage.
3. Letter of Credit: Ensuring International Trade Confidence
Primarily used in trading businesses, a letter of credit provides essential funding assurance for enterprises engaged in international trade. This business loan offers security to both buyers and suppliers, crucial in dealings with unfamiliar overseas partners, making it indispensable for businesses venturing into global markets.
4. Bill Discounting: Streamlining Cash Flow
Bill or invoice discounting allows sellers to receive advanced amounts at discounted rates from lenders. This business loan accelerates revenue while requiring buyers to contribute through interest rates.
5. Overdraft Facility: Flexibility in Cash Withdrawals
Overdraft facilities grant account holders the ability to withdraw cash even with a zero balance. Interest on this type of business loan is charged solely on the utilized amount and assessed daily. Sanctioned limits depend on the account holder’s relationship with the bank, credit history, and cash flows. This facility, often backed by collateral or securities, provides essential financial flexibility to businesses.
6. Equipment Finance: Empowering Manufacturing Enterprises
A business loan taken as equipment finance enables the acquisition or upgrade of machinery, benefiting large enterprises and those in the manufacturing sector. It comes with potential tax benefits, and terms may vary across lenders.
7. Government Scheme Loans: Tailored Financial Support
Various government schemes cater to individuals, MSMEs, women entrepreneurs, and entities in the trading, services, and manufacturing sectors. These schemes, facilitated by diverse financial institutions, offer favorable terms and conditions, providing essential financial support for business growth when a borrower takes a business loan.
8. Point-of-Sale (POS) Loans: Addressing Short-term Cash Crunch
POS loans, or Merchant Cash Advances, are business loans that alleviate short-term cash flow challenges by allowing business owners to make advance payments to suppliers through daily or future credit/debit card transactions. While interest rates may be higher, this solution proves invaluable in times of liquidity crunch.
Talk to Trusted Lenders to Find the Best Business Loan for You
If you still need help figuring out what kind of business loan is best suited for you, it is better to get assistance from trusted lenders like Tata Capital. Their dedicated team and online support, which is available 24/7, can help you determine the right business loan for your business needs.