What are business loans? Know their 7 types

Posted by neha sharma on May 27th, 2019

Finance is very essential for a business. It isn’t possible for businesses to grow and survive on their own without borrowing money. Borrowed funds can help a business expand, fulfill orders, purchase assets and generate more income from their assets. The type of finance given to businesses is called business loans.

Business loans are loans given businesses to grow. However, not all businesses have the same requirements for funds and the evolution of different businesses has led to a variety of business finance that lenders offer. These loans are generally very specific loans which can be used for the restricted purposes that they have been lent for.

The business loan interest rate depends on the type of loan that is given out. It also depends on the eligibility of the business for such loans and the financial strength of the business to repay the loan. Most lenders clearly specify business loan eligibility on their websites and these can easily be checked before applying.

These are the types of business loans:

1. Equipment finance:

Equipment finance can be either a lease agreement between the equipment manufacturer and the business. Generally, high cost assets are taken on lease.

It can also be a type of loan taken to avail assets such as vehicles or computers. Equipment finance is given on the entire purchase price of the asset and the repayments consist of a portion of the purchase price plus the interest.

2. Term loans:

These business loans are long term loans given to acquire fixed assets like land, building, heavy machinery, or acquire parts to build assets. These loans are repaid over long tenures i.e. 15 years or 20 years.

3. Overdraft:

Most businesses own current accounts with banks to help them with additional liquidity in their day to day operations. Overdraft facility can help the business withdraw additional funds from the bank without paying a high cost on it. The interest on overdraft is charged only on the amount by which the account is overdrawn.

4. Cash credits:

Lenders give out cash credit finance to businesses that hypothecate their inventory. This type of funding is given based on the value of the inventory secured.

5. Invoice discounting:

This type of business finance is given by specific lenders who provide finance based on the value of debtors appearing in a business’s balance sheet. The invoice value less interest is provided to the business and the factoring agency collects the debtors instead of the business.

6. Trade finance:

This is the finance extended by lenders to importers and exporters. This includes financing for export purchase orders, letter of credit and bank guarantee for payments among others. Trade finance is a vast network of different lenders working together in international trade.

7. Working capital loans:

Working capital loans are a type of business finance given by lenders for the day to day operations of the business. These loans are short term and temporary loans.

It is possible to apply for a business loan online directly through the lender’s website these days. To apply, you just need to fill up a form and a customer care executive from the lender will contact you for further procedures.