Types of Loans available for Small Businesses
In this dynamic world, as an entrepreneur, you may find business finances quite complicated at times. You might often wonder about a suitable path to fund your business’ needs. A business requires a wide range of aspects from purchasing assets, analysing, deciding input, necessary function expenses, regular quality check, customer satisfaction, etc.
In India, there are different types of business loans available to entrepreneurs. Such loans make it easier for you to handle your financial vows.
Following are the different easy loan options for small businesses, explained in-depth:
1. Start-up Loans
When you set up a new venture, it is known as a start-up with a novel idea. This loan is meant for new business ventures. Start-up loans are also applicable even for those applicants who do not hold a sound credit history.
- Banks/lenders usually analyse a check into borrowers’ credit profile alongside the present turnover figures, company's profile, and other financial credentials to decide the loan amount and the applicable rate of interest to check the loans’ eligibility. This helps the banks and the lender to understand the borrower’s financial state.
- The rate of interest applicable to this type of loan is generally low.
- Approval of the loan also requires the applicant to submit valid proof that the business exists and is registered. It is used as proof for the loan that the start-up exists.
- Apart from the interest that has to be paid, the borrower has to pay a one-time processing fee. The rate of one-time processing fee usually ranges from 2% to 3%. The low fee makes it viable for the new start-up holders.
- These types of loans are usually very flexible and do not have rigid terms.
- Generally, these loans are offered against no collateral. It makes it easy for young start-up entrepreneurs.
2. Business Loan for Women
Some banks/lenders/financial institutions offer special schemes for women entrepreneurs. Not only banks/lenders/financial institutions but the Government of India also started some initiatives to motivate and encourage women to set up a small to medium-size business. Such easy loans for women make it easy for young women entrepreneurs to set up their businesses and start-ups. It also helps women to restart their careers.
- The woman applicant must be at least 515 stakeholders in the venture.
- These loans provide a flexible loan amount, a lower rate of interest, and a quicker loan process for women entrepreneurs.
- 1 crore rupees can be taken as a loan on an interest rate from 7.85% to 8.10%.
- Depending on the loan amount, the Indian Government has various schemes that are listed below:
- ANNAPURNA SCHEME
- STREE SHAKTI PACKAGE FOR WOMEN ENTREPRENEURS.
3. Term Loans
In the business and entrepreneurship world, the most common loan available is TERM LOAN. A term loan is generally taken for a very specific purpose. Term loans are a cheap source of Medium-Term Financing. Such loans are useful in unprecedented times. Term Loans are flexible with not so rigid terms and conditions. It allows the business to flourish and establish with due time. Such loans can be extended over a time period of 1 year to 10 or even 30 years.
- Term Loans can be of two types:
- Secured Term Loan:
- Fixed Tenure – 15 to 20 years.
- Larger loan amount.
- Rate of Interest is usually low as some asset is pledged as collateral.
- It is viable for those businesses which are already assets, and the owner has fixed assets.
- Unsecured Term Loan:
- Fixed Tenure – 1 to 5 years
- Smaller loan amount compared to a secured term loan
- The rate of interest is a bit higher compared to a secured term loan.
- Unsecured Term Loans do not require collateral. Young entrepreneurs can easily secure this type of loan.
- Bank/Lender/Financial Institution disburses the loan amount as a lump sum. It helps the borrower to deploy the money all at once.
- The Bank/Lender/Financial Institution may ask the borrower to maintain a minimum asset base and not raise additional loans.
- Most of the Banks/Lenders/Financial Institutions provide an option to convert the term loan into equity according to their terms and conditions.
- Taxation Benefit is available on Interest which means that the interest paid on the Term Loan is a tax-Deductible expenditure.
4. Working Capital Loan
A working capital loan is taken to overcome the shortage of capital to operate a business daily effectively. This type of loan helps generate a balance in cash flow, which is necessary to run a business.
- The applicant must be at least 25 years old. The business must have a maturity of 3 years, and the last filed income tax information is required.
- Some small businessmen/entrepreneurs take this loan to deal with the shortage of cash during the off-season.
- Also, it can help meet the demand during peak seasons.
- You can use these funds in dire need and pay them back when in excess.
- Common applicants are those involved in trading, imports, and exports.
5. Invoice Financing
Invoice financing is usually done by those businesses that face a lag between raising invoices and payment for the same. Also known as Invoice Discounting. This loan is useful for short term requirements.
- Bank/Lender/Financial Institution lend money to the borrower on the amount stated in the invoice.
- The borrowed amount can be at max 80 percent of the amount raised in the invoice.
- Debt is cleared off according to the decided time for repayment and applicable Rate of Interest
- The rate of Interest usually ranges from 1.5% to 3%.
- The majority of the loan amount is lent to the borrower within 48 hrs.
- It is more flexible than most of the business loans available.
- The funding grows hand in hand with the turnover of the company.
- For your business to be eligible for invoice financing, your business should only trade with other businesses and not with consumers.
- Also, some Bank/Lender/Financial Institution requires your company to be a limited company or LLP for your company to be eligible for invoice financing.
- Other than the Rate of Interest, you have to pay a service charge also. The rates of service charge usually range from 0.75% to 2.5%.
6. Equipment Financing
Equipment financing is usually opted for by Manufacturing Businesses. Manufacturing businesses require equipment for operation which might be expensive at times. To purchase such expensive Equipment Financing or Machinery Loan is preferred. This type of loan is specific. Usually, the equipment to be bought is kept as collateral. The interest rate on the borrowed sum is usually low.
- Generally, a good credit (usually over 600) is required for eligibility.
- Bank/Lender/Financial Institution usually agrees to pay 80% to 90% of the equipment/machinery cost, which leaves only 10% to 20% of the cost that has to be paid by you.
- Apart from the rate of interest, an origination has to be paid too. The rates of origination fees usually range from 2% to 4%.
- Equipment financing can be taken for specialised, large machinery vital for business growth.
Overdraft is provided against collateral or securities. Funds can be utilized as long as all amounts are repaid according to the decided term.
- The applicant must be in the age group of 22-58 years and a monthly income of rupees 35,000 and must have held the same job for the last 6 months and hold 2 years of experience.
- Bank/Lender/Financial Institution provides the overdraft facility usually in terms of fixed deposits in Bank/Lender/Financial Institution itself.
- Bank/Lender/Financial Institution checks the credit history of the borrower and other financial aspects before finalising a certain overdraft limit.
- It is the protection provided by the Bank/Lender/Financial Institution to their customer when the account balance reaches zero.
In conclusion, we can say that a business loan should be selected based on the business profile and other requirements. You must analyse your requirement and the time frame your business will be able to pay back the amount taken as a loan. The collateral requirement may make some loans viable or out of reach for you, depending on your conditions. The future scope of the business is also essential; season demands also play a role.
1) How To Get Small Business Loan From Government?
2) What is a business loan? How to apply for a business loan?
3) What is Business Loan? A Complete Guide.
4) Are small business loans secured or unsecured?