What are the types of business loans?

Posted by nehash141 on May 10th, 2019

A business loan is a loan given to businesses to fund their expansion. Depending on the needs of the business, lenders give out different types of loans. Business loans are extremely important to fund the growth of the country since they help businesses to fulfill their fund requirements. One important thing to note is that lenders may give out special loans to women entrepreneurs to finance their businesses and these loans can be given at a beneficial rate of interest.

These are the different types of business loans:

  1. Term loan:

A term loan is a type of business loan given for a long period of time. These loans are generally secured loans given to businesses to acquire fixed assets such as land and building.

  1. Cash credit:

In cash credit, goods produced by the business are hypothecated to the bank for cash. In case of default, the lender is allowed to dispose off the goods to recover the money.

  1. Overdraft:

An overdraft can be availed by drawing funds up to a particular limit from the current account. It is necessary to have a current account to have an overdraft. Interest on overdraft is calculated on the amount that is overdrawn and not the limit that the account is allowed to draw.

  1. Trade finance:

This includes all type of finance to exporters and importers. Banks finance purchase orders while importer banks provide Letter of Credit and Bank Guarantee to fund imports of goods. This type of finance helps boost foreign trade in the country.

  1. Government schemes:

The Government has different schemes under which funds are given to enterprising businesses. Some of these schemes are:

  • Startup India
  • Standup India
  • Mudra scheme

The business has to specifically apply for the loan under these schemes to avail of loans at a cheaper rate.

  1. Equipment finance:

These type of loans help the company take an asset on lease or purchase it outright with payments in monthly installments. This type of finance is opted for by airlines and other type of transport companies with their fixed assets.

  1. Working capital loans:

These loans are given for the day to day functioning of the business. Working capital loans are short term loans which help the business meet short term fund requirements. These are temporary fund arrangements which have to be repaid soon.

  1. Bridge Loans:

Bridge loans are loans given out to bridge the gap for a business that is about to receive funding. These loans help to meet expenses till the time funding is received.

  1. Personal loans:

These can be loans against property or other assets that a business has. Personal loans can be used by the business for whatever purpose they need the funds for since these loans are unsecured and unconditional. It is possible for the business to raise personal loans since most lenders also give out personal loans to SMEs and businesses.

  1. Invoice discounting or factoring:

This type of financing is given by special factoring agencies to the business by taking over its receivables. The entire amount of receivables are not given as funds, the factoring company retains a small amount as interest. The receivable is then collected by the factoring company instead of the business.

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