Business loans to kickstart your business and aid you during a difficult situation

Loans: Working capital loans are a sort of small business loan used to overcome a business's daily cash flow constraint

  • Updated On - September 14, 2021 / 03:17 PM IST
Business loans to kickstart your business and aid you during a difficult situation
It is important to keep in mind that there are various business loans available in India, each of which is best suited for a certain situation.

In these pandemic times, arranging money for your business enterprise can be difficult at times. As a business owner, you may frequently wonder about the best strategy to fund a certain business necessity, more so in a difficult environment like today. Business requirements can range from the acquisition of tangible assets such as land or the leasing of a factory or shop to the acquisition of new machinery, working capital requirements and basic operational expenses such as overhead and salaries. However, it is critical to keep in mind that there are various business loans available in India, each of which is best suited for a certain situation.

Let’s take a look at eight different types of business loans that can cater to your need:

Term loan

A term loan is one of the most frequent types of business funding. The loan may be secured or unsecured. The credit history of the business determines the amount available.

The term is fixed, ranging between one and five years for unsecured business loans and up to 15 to 20 years for secured company loans. A term loan is used to finance a specific purpose, most commonly capital expenditure. The lender pays out the agreed funds in lump sum.

Entrepreneurial or start-up loan

A start-up loan is intended for start-up businesses. Due to a lack of business experience, applicants for these loans may not have a stellar credit history for their business. Thus, while determining the borrower’s business loan eligibility, the lender will consider both the borrower’s personal credit history and the borrower’s business credit profile.

Current turnover data and other financial information are also evaluated when determining the loan amount, tenure, and appropriate interest rate. The business must be established, and the applicant must provide documentation establishing the business’s existence and registration.

Loan for working capital

Working capital loans are a sort of small business loan used to overcome a business’s daily cash flow constraint. It maintains the essential cash flow balance for the operation of a firm. Additionally, this loan might be used to address a cash shortage during the off-season or to meet demand during a peak season. The majority of eligible applicants are service providers, manufacturers, wholesalers, merchants, or export-import traders.

Loan against property for SME

In the case of an SME loan, the applicant must mortgage their property to obtain financing for business purposes. Borrowers may secure financing against either residential or commercial real estate. Lenders can finance up to 70% of the property’s current market value.

The property’s title should be clear and unencumbered. Additionally, the mortgaged property should be free of pending litigation. The period of these loans ranges from 15 to 20 years, depending on the lending institution’s terms and conditions.

Financing of invoices

Additionally, invoice financing is referred to as invoice discounting or factoring. This financing is ideal for small firms that face a time lag between invoicing clients and receiving payment from them. The banking institution advances funds in exchange for the invoice amount. Lenders can finance up to 80% of the invoice value. Once the business receives payment, it repays the debt according to the agreed-upon duration and interest rate.

Financing of equipment

Typically, manufacturing enterprises seek equipment financing or machinery loans. Manufacturing units require expensive equipment to operate. And, of all the forms of company loans available, equipment finance is the most preferred. This is because machinery loans are unique since they need the collateralisation of the equipment in question and some other form of security. Interest rates on these loans can be lower as compared to term loans.

Women’s business loan

Certain financial institutions offer unique business lending programmes for women entrepreneurs. Even the Indian government has programmes in place to assist women in starting small to medium-sized enterprises. The benefit of specialist loans for female entrepreneurs is that they offer a customisable loan size, a start-up loan, a reduction in conventional interest rates, and a faster loan process.

Overdraft

An overdraft is a loan linked to the current account of the business, secured by securities or collateral, most commonly fixed deposits with a financial institution. Before approving a set overdraft limit, the lender considers the borrower’s credit history, relationship with the institution, business cash flow, and payback history.

The borrower may withdraw any amount necessary and pay interest on the amount withdrawn. The money may be used in this manner as long as the principal and interest are repaid according to the terms agreed upon.

Loan against the insurance policy

Loans against insurance policies are available only if particular traditional policies such as money back and endowment plans are pledged.  To qualify for a borrowing against an insurance policy, the policy must first acquire a surrender value in order for the applicant to be eligible for the loan. The policy must be assigned in favour of the insurer, and insurance companies typically pay between 85 and 90 % of the surrender value. LIC charges a 10% interest rate, which must be paid on a half-yearly basis.

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