Businesses need to get business loans to meet day-to-day business requirements, whether big or small. However, the required funding also depends upon the nature of the company. For example, are you a capital-intensive business, and what is the business development stage, such as its inception, growth, or maturity? Funds are typically needed most for businesses in their beginning stages. Therefore, here are some types of business loans that financial institutions sanction.
- Working capital loans
The purpose of these easy cash loans is to enable enterprises to meet their daily business requirements, such as buying machinery and equipment, managing the business’s cash flow, purchasing raw materials, maintaining inventory, and paying salaries. In most cases, working capital loans are short-term loans with a 12-month repayment period. These are collateral-free loans, where the borrower is not required to submit any collateral or security with the bank. The interest rate offered here is higher than any long-term or general business loan. In this loan, the bank sets a limit for the business to take a loan, and one can utilize the amount for specific business purposes only.
- Term loan
One must repay these small loans for business in regular payments over a set period. Term loans categorize into short-term and long-term loans, and their repayment tenure ranges between twelve months to ten years. Short-term loans are twelve months, whereas it is up to ten years for long-term loans. And the amount offered by the bank ranges from rupees one lakh to one crore, which can even exceed depending upon business requirements. The lender finalizes the repayment tenure for a term loan while filling out the loan application.
- Letter of credit
Letter of credit is a credit limit used majorly in trading businesses in which the bank or lender provides funding guarantees to enterprises that deal in international trade. Entrepreneurs can utilize letters of credit for both import and export purposes. Furthermore, enterprises doing business overseas tend to deal with some unknown suppliers, so they require assurance of payment before performing any transaction. Therefore, a letter of credit plays a vital role in providing payment assurance to the suppliers.
- Bill or Invoice Discounting
Bill discounting or invoice discounting is a funding technique that allows a seller to receive a discount from the lender for an amount in advance. It requires buyers to contribute their interest rate to increase the financial institutions’ revenue, both interest paid and the monthly fee.
- Overdraft loan
The overdraft facility is a funding method offered by banks to their customers, allowing them to withdraw funds even when the account balance is zero. An interest rate is charged only on the amount utilized from the sanctioned limit daily. The approved credit limit depends upon the account holder’s relationship with the bank, credit history, cash flows, and repayment history if any. The overdraft limit gets reviewed yearly. And it is used in any way as long as the interest is given on time. You can get against collateral or securities in this facility, especially fixed deposits with the bank.