A business loan provides financing to help businesses cover various expenses, such as working capital, equipment purchase, or business expansion. To apply for a business loan, you'll typically need to be a registered business (sole proprietorship, partnership, or company), have a minimum turnover and business vintage, and demonstrate profitability.
Several financial institutions, including banks and NBFCs, offer business loans with varying interest rates and tenures
A working capital loan is a business's financial lifeline, primarily intended to fund day-to-day operations, encompassing accounts payable, employee wages, and other immediate financial obligations. These loans can be secured or unsecured, depending on the company's financial health and required loan amount.
It's essential to note that a working capital loan is not intended for capital asset purchases or expansive business ventures. Instead, it meets short-term financial commitments and sustains daily operational expenses.
Term loans are among the most common types of business funding. These loans can be secured or unsecured, with the amount available often contingent on the business's credit history.
Borrowers receive a lump sum of capital upfront, repayable with interest over an agreed-upon period. Unsecured term loans generally span one to five years, while secured term loans can extend up to fifteen or twenty years.
A letter of credit serves as a financial safeguard in international trade, assuring buyers and sellers that transactions will proceed smoothly. This credit instrument is especially important when dealing with unfamiliar suppliers in foreign markets.
Bill or invoice discounting allows businesses to access immediate cash flow by selling their unpaid invoices to a lender at a discounted rate. This type of business financing benefits sellers by accelerating cash inflow and, in turn, aids lenders in generating revenue through interest rates levied on buyers.
An overdraft facility, offered by banks to account holders, permits withdrawals even when account balances hit zero. Interest accrues on the utilised amount from the approved limit daily. They can be secured by collateral, often as Fixed Deposits (FDs) with the bank.
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Machinery and equipment finance loans provide funding for acquiring or enhancing machinery and equipment. It is generally used by large manufacturing companies, this financing option offers tax benefits.
The Government of India has launched various types of loan schemes to promote MSMEs, individuals, women entrepreneurs, and entities in the services, trade, and manufacturing sectors. These schemes are extended through public and private sector banks, Regional Rural Banks (RRBs), NBFCs, Small Finance Banks (SFBs), Micro Finance Institutions (MFIs), and more. For example, Mudra Scheme under PMMY, Standup India, CGTMSE, Startup India, etc.
Merchant Cash Advances (MCAs) or POS Loans involve businesses receiving an upfront lump sum from suppliers in exchange for a portion of their daily or future debit and credit card transactions. Merchants often turn to POS loans to alleviate liquidity challenges, though they come with higher interest rates than other business loan types.