Types of Business Loans in India

In India, business loans come in various forms to cater to the diverse needs of businesses, from startups to large enterprises. Different types of business loans are offered by banks, non-banking financial companies (NBFCs), and government initiatives to support business growth and operations. Below are the common types of business loans available in India:

1. Term Loans

Purpose: These are the most common types of business loans, used for capital expenditures, purchasing machinery, infrastructure development, or other business expansion needs.
Loan Tenure: Can range from short-term (1-3 years) to long-term (up to 10-15 years).
Collateral: Can be secured or unsecured, depending on the borrower’s credit profile and the lender’s requirements.

2. Working Capital Loans

Purpose: These loans are designed to help businesses meet their short-term operational needs, such as covering daily operational costs, managing cash flow, or bridging gaps between payables and receivables.
Loan Tenure: Typically short-term, up to 12 months.
Collateral: Can be secured or unsecured, based on the loan amount and business creditworthiness.

3. Business Line of Credit

Purpose: A flexible form of credit where the business is given access to a certain amount of funds and can withdraw as needed, paying interest only on the amount utilized.
Loan Tenure: Revolving credit with flexible tenure, usually renewable annually.
Benefit: It offers flexibility in borrowing and repaying as per business needs.

4. Equipment Financing

Purpose: Used specifically for purchasing machinery or equipment required for the business. The equipment itself serves as collateral for the loan.
Loan Tenure: Typically, medium-term loans up to 5 years, depending on the life of the equipment.
Benefit: The loan amount is generally up to 80-90% of the equipment cost.

5. Invoice Financing (Bill Discounting)

Purpose: Helps businesses raise funds against outstanding invoices or receivables. The lender advances a percentage of the invoice value before the customer payment is received.
Loan Tenure: Short-term financing, typically up to 90 days (based on the invoice cycle).
Benefit: Improves cash flow without waiting for the customer’s payment cycle.

6. Overdraft Facility

Purpose: An overdraft is an extension of credit on a business’s current account. It allows businesses to withdraw more money than they have in their account, up to a certain limit, to cover short-term cash flow needs.
Loan Tenure: Ongoing, with limits reviewed periodically by the bank.
Benefit: Interest is charged only on the overdrawn amount, offering flexible short-term credit.

7. Merchant Cash Advance (MCA)

Purpose: This loan is offered to businesses that accept payments through credit and debit cards. The advance is repaid through a percentage of daily sales.
Loan Tenure: Short-term financing, typically repaid in 6 to 12 months.
Benefit: Repayment is linked to daily transactions, so businesses with fluctuating sales can manage repayments more easily.

8. Start-Up Loans

Purpose: These loans are specifically designed for new businesses or startups to cover initial operating expenses, infrastructure development, or working capital needs.
Loan Tenure: Short to medium term, depending on the lender and the amount borrowed.
Collateral: Some lenders may require collateral, while others provide unsecured start-up loans based on business plans and projected cash flow.

9. Micro, Small and Medium Enterprises (MSME) Loans

Purpose: Offered to MSMEs for business expansion, infrastructure development, purchasing machinery, or covering working capital requirements.
Government Schemes: Loans under government initiatives like the Pradhan Mantri Mudra Yojana (PMMY), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), and Stand-Up India Scheme.
Loan Tenure: Usually short-term, but can vary depending on the scheme.

10. Trade Credit

Purpose: This type of loan is offered to businesses involved in international trade, allowing them to finance import or export activities. It helps businesses manage the working capital required for shipping, warehousing, and customs clearance.
Loan Tenure: Short-term, based on the trade cycle.
Types: Letter of credit, export credit, and import financing.

11. Business Credit Cards

Purpose: Business credit cards are similar to personal credit cards but designed specifically for business-related expenses. They offer short-term credit with a revolving credit line.
Benefit: Provides quick access to funds and rewards for business purchases, along with interest-free periods (if repaid within the billing cycle).

12. Government-Sponsored Business Loans

Purpose: These loans are backed by government initiatives to promote entrepreneurship, especially among small and medium enterprises (SMEs) and specific sectors.
Key Schemes:
- Mudra Loans (under PMMY): For micro and small enterprises, up to ₹10 lakh.
- Stand-Up India Scheme: Provides loans between ₹10 lakh and ₹1 crore to women and SC/ST entrepreneurs.
- Startup India Scheme: Aimed at providing financial assistance to startups across sectors.
- National Small Industries Corporation (NSIC) Loan: Provides financial assistance to small-scale industries.

13. Loan Against Property (LAP)

Purpose: A secured loan where the borrower pledges commercial or residential property as collateral to raise funds for business purposes. This type of loan is used for business expansion, working capital, or large expenses.
Loan Tenure: Long-term, up to 15 years, depending on the value of the property.
Benefit: Lower interest rates due to the collateral involved.

14. Franchise Financing

Purpose: Offered to entrepreneurs looking to open or expand a franchise business. The funds can be used for buying a franchise, covering operational costs, or acquiring equipment.
Loan Tenure: Medium to long-term, depending on the lender’s requirements.
Collateral: Some franchise loans may require collateral, while others may be unsecured.

15. Loan Against Securities

Purpose: Businesses can pledge their financial securities (like shares, mutual funds, bonds) to avail of funds to meet business expenses.
Loan Tenure: Short to medium-term.
Benefit: Flexible loan options with competitive interest rates based on the value of the securities pledged.

16. Export and Import Financing

Purpose: Special loans for businesses engaged in international trade, used to finance the production, shipping, and delivery of goods for export, or to import goods for resale or production.
Types: Includes pre-shipment and post-shipment finance, export credit, and letter of credit financing.
Loan Tenure: Short-term, based on trade cycles and customs regulations.

These business loans cater to a wide range of financial needs, from short-term cash flow management to long-term capital investments, helping businesses at different stages of growth. The choice of loan depends on the business’s size, type, and specific financial requirements.