What you need to know about investing in India: types of business loans in India www.deekpay.com

Loans that are used exclusively for business purposes are called business loans. Business loans provide financing to business owners in the form of a line of credit or a lump sum payment. In exchange for this funding, the business agrees to repay the loan in instalments along with interest and fees. The content of this article analysesIndiaType of business loan approved by the financial institution.

There are broadly 8 types of business loans in India:

Working capital loans Term loans (short-term and long-term loans) Letters of Credit Bill/invoice discounting Overdraft Limit Equipment financing or machinery loans Loans under government programmes POS loans or merchant cash advances

Working capital loans

Individuals, entrepreneurs, start-ups and MSMEs use working capital loans to meet their day-to-day business requirements and for various business expansion services, to improve business cash flow, to purchase raw materials, to increase stock/inventory, to pay salaries, to hire employees etc. Working Capital Loans are mainly short-term loans of up to Rs. 4 million with a repayment period of up to 12 months or possibly more than the business requirements. The interest rates offered by banks/NBFC are slightly higher as compared to long term loans or general business loans. In this type of loan, the lender sets a limit on the business loan and the loan amount can only be utilised for specific business purposes.

Pros:

This is a debt financing and does not require an equity transaction. Allows companies to cover gaps arising from working capital expenditure. Some working capital loans are unsecured, and businesses are not required to retain collateral to secure the loan.

Drawbacks:

Working capital loans typically have higher interest rates. The loan is tied to the credit of the business and any missed payments will affect the business's credit score and your personal credit score. Working capital loans are best suited for businesses looking to cover day-to-day operating costs. They are ideal for seasonal businesses and small business owners who need an occasional injection of cash to keep operations going and maintain business cash flow.

term loan

Term loans are loans that need to be repaid at regular intervals over a certain period of time. Term loans are categorised into short-term, medium-term and long-term loans. The repayment period for these two types of loans ranges from 12 months to 5 years. Term loans with a shorter tenure (12 months) are called short term loans and those with a tenure of 5 years or more are called long term loans. Unsecured business loans are available up to a maximum of Rs. 20 million and may exceed Rs. 20 million depending on business requirements. The repayment period of a term loan is determined by the lender at the time of loan application.

Pros:

Businesses can get cash up front. Businesses are usually allowed to borrow higher amounts than other business loan types. A quick one-time payment of funds. Predictable payment schedule.

Drawbacks:

Repayment schedules are not flexible. Collateral may be required. Term loans are best suited to businesses looking to expand and are ideal for business owners with a good credit history who don't want to wait too long for funding.

letter of credit

A letter of credit is a line of credit used primarily for trade operations, whereby a bank or lender guarantees funds for a business engaged in international trade. Entrepreneurs can use letters of credit for importing and exporting. Businesses operating overseas often deal with unknown suppliers and therefore they need to obtain payment guarantees before entering into any transactions. Letters of credit therefore play a vital role in providing payment guarantees to suppliers.

Pros:

Letters of credit are highly customisable, allowing both trading partners to set terms and conditions. It gives trading partners the confidence to transact with unknown partners or to establish new business overseas. The issuing bank or lender is independent of the trading partner's obligations and the seller receives payment upon fulfilment of the terms. The seller has no credit risk. Usually unsecured, so no collateral is required.

Drawbacks:

Bank charges and other fees add to the cost of doing business. Handling fees are time-consuming. The rules governing letters of credit are complex and carry foreign exchange risk Letters of credit are best suited for businesses that deal in international markets and wish to expand.

bill discounting

Bill discounting or invoice discounting is a form of financing in which the seller receives an advance from the lender at a discounted rate. This requires the buyer to make a contribution in the form of an interest rate, which increases the income of the financial institution in the form of interest payments and monthly fees.

For example, if you have sold the goods to Mr Singh and he has issued a bank letter of credit to you for 45 days, and if you want to get the money from the bank before the 45 days, the bank will charge you a certain amount of interest, which is known as seller's discount. Further, assuming that the amount due to you on or after the 45th day is Rs. 1 lakh, by way of the bank's discount or interest rate of Rs. 50,000, you now get Rs. 9,50,000 from the bank. In any case, the buyer will deposit Rs. 1 million with the relevant bank on the 45th day.

Pros:

Get cash fast. Release cash that has been locked in an invoice. A faster way to raise short-term finance. No risk to assets and facilitates credit sales.

Drawbacks:

Borrowing on commercial invoices only is permitted. Discounting of bills may not be sufficient if the business is seeking a commercial loan for a specific amount. Bill discounting is best suited for businesses looking to restore cash flow, fund business expenses and stabilise growth.

overdraft facility

An overdraft facility is a form of financing offered by banks to their account holders to withdraw cash from their accounts even if the account balance is zero. The interest rate is charged on a daily basis only on the utilised amount within the approved limit. The approved credit limit depends on the account holder's relationship with the bank, credit history, cash flow and repayment history, if any. Overdraft limits are revised annually and can be used in any manner if interest is paid on time. Overdraft facility is provided against collateral/securities, especially fixed deposits with banks.

Pros:

Minimal paperwork and flexibility. Facilitates timely processing of funding mismatches. Interest rate is lower as it is calculated only on the basis of the amount of funds utilised.

Drawbacks:

An overdraft line is a temporary loan with the risk of a reduced credit limit. It is collateralised by collateral/securities and if the business is unable to repay the loan, it may face the risk of seizure of assets. An overdraft facility is best suited to businesses that often face short-term cash flow problems but can repay their borrowings at very short notice.

Equipment financing or machinery loans

Equipment financing or machinery loans are a financing option offered to borrowers to purchase new equipment/machinery or to upgrade existing equipment/machinery. Equipment financing is primarily used by large corporations and businesses engaged in manufacturing. Businesses or business owners who receive equipment financing or machinery loans may also be eligible for tax incentives. Loan rates, loan amounts and repayment terms vary by lender.

Pros:

Receive funds quickly to purchase, repair or lease equipment/machinery. Opportunity to spread the cost of purchases to avoid getting into cash flow problems. Equipment loans do not require additional collateral.

Drawbacks:

Use is limited to equipment/machinery. Machinery loans offer higher interest rates than traditional bank loans. Equipment financing or machinery loans are best suited for large businesses that are part of the manufacturing industry and need money to purchase machinery or equipment.

Loans under government schemes

The Government of India has introduced various loan schemes for individuals, MSMEs, women entrepreneurs and other entities engaged in trade, services and manufacturing. Loans under the government schemes are provided by various financial institutions such as private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Microfinance Institutions (MFIs), Small Finance Banks (SFBs) and others. Some of the leading government loan schemes include PMMY, PMEGP, CGTMSE, Standup India, Startup India, PSB loans within 59 minutes, Mudra scheme under PMRY etc.

Pros:

Supported by the Government of India. Interest rates are low. Relatively low down payment options.

Drawbacks:

The loan application process is highly competitive. Some schemes provide strict guidelines on how businesses must spend the approved amount. Personal guarantees are required, such as for your commercial property. Loans under government schemes are best suited for start-ups and existing businesses that want to expand. These loans provide business owners with easy access to capital to turn their solid business ideas into profitable ventures.

Point of Sale (POS) Loans

A POS loan or merchant cash advance is a mechanism whereby a business owner running a business advances a sum of money to a supplier through their daily or future credit or debit card transactions. SME merchants sometimes experience short-term cash shortages. Therefore, in order to minimise the shortage of liquidity in their businesses, merchants opt for POS loans. POS loans offer relatively high interest rates compared to other types of business loans. The repayment instrument is associated with a debit or credit transaction on point-of-sale (POS) machines installed in retail shops, grocery shops, supermarkets and shopping centres.

Pros:

Manage cash flow issues instantly. Repayment tools are simple and minimally documented.

Drawbacks:

High interest rates. POS loans are best suited for businesses that need to pay a lump sum in advance to suppliers and need funds to overcome a cash flow crunch.

Business loans in India are available at nominal and attractive interest rates with flexible and simple EMIs. the best business loan deal can be selected by comparing various loan deals offered by leading private and public sector banks, NBFCs, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Microfinance Institutions (MFIs), and a wide range of other banks and financial institutions.

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