New Delhi: Business loans are financial products offered by financial institutions or alternative lenders. They provide funding to businesses to meet various needs. This is a form of debt financing in which a company borrows money for a certain amount and agrees to pay it back over a set period of time with interest. Keep reading to learn more about business loans and why you might need one.

Different types of business loans

There are many types of business loan available to meet different financial requirements and circumstances. Here are some types of common business loans –

Working Capital Loan

• Term Loan (Short & Long-term Loan)
• Letter of Credit
• Equipment Loan or Machinery Finance
• Discount on Bills/Invoices
• Overdraft Facility
• Merchant Cash Advance or POS Loans

Working Capital Loan

Working capital loans are a type business loan that covers a company’s daily operational costs, including payroll, inventory, rent, utilities and other expenses. This loan is designed to assist businesses in managing their cash flow, and ensure smooth operation.

Working capital is the amount of money needed by a company to meet immediate obligations and continue its operations.

Term Loan

A term loan in India is a business loan that banks, financial institutions and non-banking finance companies (NBFCs), provide to support different business purposes. In India, term loans are an extremely popular way to finance businesses. They are available to both small and larger enterprises. These loans are classified into three categories – short-term (short-term), intermediate-term (intermediate-term), and long-term. The borrower must repay the loan at regular intervals over a certain period of time.

Letter of Credit

Letters of Credit are a common financial instrument used in international transactions. A bank will issue a letter of credit at the request from a buyer to guarantee payment of the exporter to the seller. Many companies do business abroad and require payment guarantees. In such cases, a letter of credit may be helpful.

Equipment Loan or Machinery Finance

Equipment finance is a form of financing that focuses specifically on the provision of funds to businesses for the purchase or leasing of equipment. This allows businesses to purchase the equipment needed to expand or operate their business without making a large payment upfront. These loans offer tax advantages to businesses.

Bill Invoice/Discount

Bill invoice discounting is also known as invoice factoring or invoice financing. It’s a financing agreement where a company sells their accounts receivables (unpaid invoices from customers) to a financier (factor) for a discounted price. The business can access cash immediately instead of having to wait for the customers to pay on their original due date.
Bill invoice discounting is a process where a financial institution purchases the invoices for a discounted price. This means that the business receives less than the face value of each invoice.

Overdraft facility

Overdraft facilities are a financial arrangement that banks offer to businesses. They allow them to withdraw money from their bank account when the balance is higher than what they have available. This facility allows businesses to access additional working capital on a short-term basis to help them meet their cash flow requirements or to cover unexpected expenses.

POS Loans

Also called Point-of Sale loans or Merchant Financing, this type of finance allows customers to get instant loans when they make purchases. The merchant or retailer facilitates these loans in partnership with financial institutions or lending platforms.

Businesses can also apply for loans through various government schemes, such as Startup India, Pradhan Mantri Mudra Loans, etc. Visit the website to learn more.

Business Loans – Benefits

Businesses can benefit from business loans in many ways. Here are a few common benefits that businesses can expect from a loan.
• Capital to invest, start up, expand or operate their business.
• Business loans can be used to manage working capital efficiently. You can use them to cover short-term cashflow gaps, pay suppliers, handle inventory, or deal with unexpected expenses.
• Businesses can take advantage of loans to grow.
• A business loan provides stability and flexibility by ensuring that a constant flow of funds is available when required.
• Repaying a loan successfully helps to establish and improve the credit history of a business.
• Keep full control and ownership of your company, rather than seeking additional investors or business partners.
• Tax benefits for businesses can be obtained by deducting interest on loans.
Before applying for a loan, it’s crucial that businesses carefully evaluate their financial needs and compare the terms and costs of different loan options. They should also assess their ability repay the loan. Consultation with financial professionals and lenders can also help businesses make informed choices about loan options, including their impact on the financial health of their business.

How to apply for a business loan?

Apply for a loan by following the steps below –
• Decide Your Loan Purpose.
• Find out which lenders and products are best suited to your needs by researching different options.
• Compare interest rates, repayment periods, fees and business loan eligibility requirements.
• Prepare all your documents, such as business plans, financial statements and tax returns.
• Check your credit report for red marks.
• Write a proposal for a loan that details your request.
• To begin the application process, contact the lender chosen or visit their website.
• Complete the loan application, giving accurate and detailed details about your company, finances, and personal information.
• Review the terms and conditions of the loan if the application has been approved.
• The lender will transfer the funds into your designated account upon acceptance.

The eligibility criteria for business loans

Before approving business loan applications, lenders evaluate the following factors –
• Type of business and age
• Credit History
• Revenue and Financial Performance
• Collateral
• Stability of business
• Existing debt and payment records
• Legal Compliance
Terms can differ for different lenders. To learn more, please contact the lender.