Finance blogBusiness / SME

Top 5 types of business loans that you can apply for


Top 5 types of business loans that you can apply for

There are several kinds of business loans available for companies and entrepreneurs. It is natural for companies to require capital at strategic moments in order to consolidate, grow and revive their businesses. There may be a cash crunch faced by any business at certain time periods and this is when funding comes in really handy.

It may also be necessary whenever a business has to fulfil a large order and needs to build inventory or hire people to meet a bulk requirement. Working capital may also be needed at strategic points prior to client payments flowing in. These are all situations which necessitate suitable business loans. These loans help in filling up the gaps between the receipt of working capital.

Here’s taking a look at the top 5 types of business loans that you can easily apply for:

  • Demand Loan- A demand loan is one which the bank/financial institution can recall at any moment. The borrowers have to repay these loans whenever they are demanded by the lender even if a shorter notice period is given for repayment, say within 1-7 days. This depends on the policy of the financial institution and terms and conditions of the loan agreement. The demand loans may be secured or even unsecured and they usually help in meeting working capital requirements for the short term and can be repaid once money flows into the company. These loans usually have maximum tenors of 12 months post which they can easily be renewed as well.
  • Term Loan- Term loans come in handy whenever there has to be an acquisition of assets for the long-term including machinery and equipment, land, buildings and so on. These loans help in coming up with financing for infrastructure development, land purchases, building work, buying a building, buying new machinery or other equipment, renovation work, infusing capital into growth plans and buying vehicles if needed among other objectives. These are loans with pre-specified schedules for repayment which can be either quarterly or monthly. The rate of interest may be a floating rate or fixed rate depending on the financial institution in question. The maximum loan tenor is mostly 3 years in case of loans which are unsecured and it can go up to 15 years in case of secured loans, i.e. those secured with collateral/assets. The loan amount will naturally vary depending on the overall eligibility of the borrower and his/her specific requirements.
  • Loan against securities- In case there are financial securities owned by the business promoters/partners/proprietors in the form of demat shares/stocks, mutual funds, insurance policies, fixed maturity investment plans, bonds and funds traded on the exchange, loans can be taken against these in order to cater to the financial needs of your company. The funds that you raise can be guaranteed with these financial securities. The loan tenor will be up for renewal on a yearly basis in most cases. However, the financial securities in question should have approval from the financial institution that you are applying to.
  • Overdraft and Cash Credit- There are cash credit loans which are usually sanctioned in the form of overdrafts based on the security of the stock held by the customer in raw materials or the trade. This can be availed by guaranteeing present assets of the business like receivables or the inventory and the limit on withdrawal is usually 70-80% in most cases. Financial institutions make sure that the outstanding balance is lower than the customer’s withdrawal abilities. Tenors are usually renewed annually for these types of loans and they help in funding working capital requirements.

Bank overdrafts are also facilities where you can easily debit from the current account till a specified limit below zero. This limit is given by the financial institution on the basis of the securities or assets like property which have been pledged by the customer or holder of the account and also the individual’s repayment abilities. The lender will charge interest only on the specific amount that is being used. The lender may ask the customer to repay the money borrowed within short notice in most cases.

  • Bank Guarantee and LC- This is a specific type of credit where a letter is given to the seller by the financial institution. This guarantees the seller that the payment from the buyer will be received by him/her in a timely manner and for the exact sum payable. In case the payment for this transaction cannot be made by the buyer, the financial institution will be taking care of the outstanding amount based on the specific conditions. The LC (letter of credit) option can be tapped for multiple global and domestic trade based transactions with a view towards ensuring that sellers get timely payments from buyers even in cases where they are functioning in diverse locations.

Letters of credit are usually given by lenders on the basis of assets and other inventory pledged by the customer. The requirement of the margin ranges anywhere between 60-80% of assets on the basis of the profile of the borrower and the tenor of the letter of credit usually comes up for renewal annually. Bank guarantees lower losses in case there are unplanned issues with transactions. The beneficiary is always guaranteed a specific amount and this is only paid up when the obligations in contracts are not fulfilled by the other party. This facility safeguards sellers/buyers from damages/losses arising from issues with other parties.

There are several banks, NBFCs, online lending platforms and other financial institutions who are offering various business loans to start-ups, entrepreneurs and other companies. There are working capital loans offered by several financial institutions along with line of credit facilities where businesses can withdraw money based on requirements at any given time and pay interest on the money used. They can repay the entire amount outstanding at the end of the loan tenor in these cases.


Share this post