If you own a business, you must be aware that you need a constant inflow of cash to run your business. Lack of funds at the right moment can break your business. Every business goes through cash crunch cycles at some point in time, and if it’s a new venture, such situations are more frequent.
As a business owner, you can keep complaining about your losses or lack of funds. No matter what, you must keep moving ahead to ensure your business is growing.
Businesses will always have working capital gaps in cycles and need for periodic capital infusion. How will you manage these demands? Business Loans are one of the best alternatives to finance all such business needs.
Here are top five Types of Business Loans based on the purpose for which they are obtained that can help you run your business successfully.5 Business Loan Types for All Your Business Finance Worries
Demand loan can be recalled by the bank or other financial institution at anytime. The borrower will have to repay it when bank demands even if it is within a short period of time (1 to 7 days) depending on the bank’s policy on which the loan was given.
Demand loans can be unsecured as well as secured in nature and comes at very fine pricing. These loans are usually obtained to overcome short-term working capital gaps. The maximum term for these loans is 12 months, after which they can be renewed.
If you want to acquire long-term assets like building, land, machinery, etc., you should go for a term loan. You can finance building, land, infrastructure creation, purchase of a building, renovation, purchase of machinery, equipment, capital infusion, and vehicles with a term loan.
Term loan comes with a fixed repayment schedule (monthly or quarterly). The interest rate may either be fixed or floating. Usually, the maximum tenure for a term loan is 3 years (in case of unsecured loan) and 15 years (in case of secured loan). The quantum of the loan may vary according to the borrower’s need and eligibility.
Loan Against Securities
If you have invested in any financial security like mutual funds, demat shares, fixed maturity plans, insurance policies, exchange traded funds, and saving bonds, you can avail loan against them to meet your business financial needs. You can use the funds raised by pledging financial securities for any purposes. Tenure of such loans is renewed every 12 months.
However, only those shares, insurance policies, and mutual funds can be pledged to raise funds which are approved by the bank.
Cash Credit Facility and Overdraft Facility
Cash credit loans are granted as overdrafts on the security of borrower’s stock in trade/raw materials/process. You can secure cash credit facility by pledging your current business assets such as inventory or receivables. Limit on cash credit withdrawal (which is usually 70-80%) is based on your drawing power which is calculated after deducting margin fixed by banks over the stocks. Lenders always ensure that the balance outstanding is lesser than the drawing power of the borrower. The tenure for this loan is renewed every 12 months. This facility is suitable for financing your working capital needs like inventory and receivables.
On the other hand, bank overdraft is a facility wherein the bank allows you to debit your current account below zero, up to a specified limit. The overdraft limit is predefined by the bank based on the securities (such as property or other financial asset) pledged by the customer/ account holder or his/ her repayment capacity. Interest is charged only on the amount utilised. The bank reserves the right to ask for repaying the money at short notice.
Letter of Credit (LC) Facility and Bank Guarantee
It is a type of credit facility wherein a bank provides a letter to the seller guaranteeing him/her that a buyer’s payment will be received by the seller on time for the correct amount. If the buyer is unable to make payment for the purchase, the bank will cover the entire outstanding payment on certain conditions.
Letter of credit facility is used in various domestic as well as international trade transactions to ensure sellers receive payment on time by the buyers even if they are operating in different nations and do not know each other.
Lenders require you to pledge inventory and capital assets for extending the letter of credit. The margin requirement varies between 60 – 80% of the assets based on the borrower’s profile. Letter of credit’s tenure is renewed every 12 months.
On the contrary, bank guarantee facility reduces the loss if transactions don’t go as planned. A bank guarantee also guarantees a certain sum to the beneficiary, and pays that sum only when the opposing party doesn’t fulfill the obligations stipulated under the contract. This facility is used to insure buyers or sellers from any loss or damage caused by nonperformance of the other party.
Documents Required to Apply for a Business Loan:
- Identity Proof: Passport, Driving License, PAN card, Voter’s ID and so on
- Bank Statement
- Latest Income Tax Certificate
- Audited Financials for the past three years
- Address Proof: Trade License, Electricity Bill, Ration Card and so on
Who Can Apply for a Business Loan?
Any self-employed individual or professional, sole proprietorship, limited or private limited company, and partnership firm.
The borrowing business should be working in a profitable state since at least last 6 months or 1 year (requirement varies from lender to lender) at the time of applying for a Business Loan.
The age of the borrower should be between 25-65 years.
How to Apply for a Business Loan?
You can either choose to visit a bank or other financial institution in-person or apply online for instant approval and funding. Nowadays, there are a plenty of online lending marketplaces or fintech companies through which you can apply for Business Financing.
Best Business Loan Providers in India
HDFC Bank Business Loan
Bajaj Finserv Business Loan
Tata Capital Business Loan
IDFC First Business Loan