There are various kinds of business loans in India categorized according to the application of funds. Types of business loans vary as per the loan application. For an entrepreneur, it is vital to know the type of business he/she is starting and apply for the appropriate business loan type based on the requirement of the business within the framework. Business evaluation is also the main factor that decides the type of loan for a business.
Be it big or small entrepreneurs are usually in need of funds for meeting business requirements. The required funds depend on the nature of the business – Capital intensive and the stage of development. Most firms require the initial stage of business for the growth perspective and this is the time when entrepreneurs apply for different types of business loans in INDIA.
If you are also an entrepreneur and searching for an appropriate business loan type, this article will surely help you to identify your loan requirement and apply for the most suitable types of loans for business. So let’s start with the major types of business loans in India and discuss them in detail.
Different Types of Business Loans
Business loan types can be the saviors for new entrepreneurs who have a great business idea but lag the financial support. Depending on the type of business there are various types of business loans in INDIA that are available for helping entrepreneurs to meet their business requirements and grow their businesses without any financial crisis.
Here we will discuss seven major types of loans for business and their features in detail. The most business loan requires collateral while others are obtained by fulfilling some contract obligations. Let’s find out each type of business loan ad its advantages.
1. Term Loan
A term loan is the most sought type of business loan in INDIA by new entrepreneurs and is provided for purchasing long-term fixed assets such as machinery land or infrastructure. This business loan type has a fixed repayment schedule but the interest rate is usually floating.
Many financial institutions of the term loan with fixed interest rates also. With the repayment term as monthly or quarterly. The tenure of these types of business loans in INDIA usually varies from 2 years to 10 years. You can buy long-term assets using this business loan type such as infrastructure creation, equipment, machinery, etc.
2. Loan Against Property
The loan against property is the type of business loan in INDIA that is raised by providing residential or commercial land as collateral security to the financial institution. The amount rais by this type of business loan is utilized for any purpose such as advertising staff salary starting a new business buying land business expansion etc. Finally, there are no restrictions on the use of the amount sanctioned by the bank. The tenure of this type of business loan in India varies from 3 to 15 years according to the profile of the borrower. These types of loans for businesses require more margin and can be used for any kind of expensive business.
3. Gold Loan
Gold loan is one of the easiest types of business loans in India that can be obtained against gold jewelry or gold coin. The amount sanctioned by the financial institution can be used for any purpose regarding business requirements. Most banks do not lend over 20 lacks INR to an entrepreneur as a gold loan. The tenure of this type of business loan in India varies from 12 to 13 months as per the CIBIL score of the borrower with a margin requirement of 5%. However, this business loan type charges a high-interest rate and high premiums for return.
4. Loan Against Shares or Financial Security
Loan against shares or financial security is the most popular type of business loan in India and can be raised against financial securities like Demat shares, mutual funds, exchange-traded funds, saving bonds, etc. there is no restriction for the use of this business loan type and can be used for any business-related purpose.
However you cannot use all types of shares and mutual funds, only the bank-approved policy or shares can be pledged. There is no marginal requirement for these types of loans. For business and the tenure is renewed every 12 months.
5. Cash Credit Facility
These types of business loans in India are granted as overdrafts on the security of stocks and trade/ raw material or in process. These business loan types are obtained by pledging current assets such as inventory or receivable. Moreover, the cash credit limits of these business loan types are based on drawing power after the deduction of margin. The assets are financed by using the organization’s assets at the margin requirement of 70 to 80% and renewed every year.
6. Letter of Credit
A letter of credit s a business loan type that provides a credit facility wherein the financial institution sets certain conditions for providing the amount to the seller. In case the buyer fails to make payments on the purchases.
The outstanding amount is covered by the bank. Entrepreneurs can use the letter of credit in any international and domestic trade transaction. Where the buyer and seller are unknown to each other and working in different countries. The assets used for obtaining this business loan type are inventory and capital assets at 60 to 80 % margin requirement and renewed every year.
7. Bank Guarantee
A bank guarantee is a business loan type that is a promise from the bank that the bank will meet the liabilities of the debtor if he fails to fulfill the contractual obligations. This type of business loan can be classified as a performance guarantee.
Moreover, Bid bond guarantee, financial guarantee, advance payment guarantee, foreign bank guarantee, and deferred payment guarantee.
Types of Business Loans In India – FAQs
Which type of business loan in India is best for new entrepreneurs?
Ans. The gold loan and term loans are the two best types of business loans in India for new entrepreneurs.
What are the assets that can be used for getting a cash credit facility?
Ans. Inventory and receivables can be used as collateral security for obtaining a cash credit facility.