Types of Business Loans You Need to Know About

Posted by Arjit Chalmela on January 14th, 2020

Business loans are a crucial requirement for all types of businesses. Banks play an important role in economic growth by providing capital to these businesses for their growth and expansion. Whether it is a large company or an SME, a business loan forms the basis of capacity expansion in the country. With growing complexities of business, the credit given out are not the same type of loan. These loans are customised for each business depending on their needs by the lender. Businesses need to learn and understand the different types of loans that are available so that when they need funds, they can apply for the right one. Each kind is different in character and has a different structure and interest rate system –

1. Term loans:

They are long term loans that are extended for purchasing fixed assets like land or for construction of building. These loans have the longest repayment tenure among business loans. The rate of interest is generally fixed with a standard EMI repayment schedule. Term loan also gets extended for purchasing heavy machinery that is either constructed or assembled in the factory.

2. Trade finance:

It is broad term covering loans that are extended by lenders for the purpose of import and export operations. This includes funding purchase orders for an exporter, covering the transport, shipping for the order, providing bank guarantee and credit in case of an importer, providing short term loans to transport the import order from the customs or port of entry to the business premises, providing funds to pay customs duty, etc. Trade finance covers a broad range of activities which are related to import and export of goods and services. Trade finance is broad and covers a lot of different items.

3. Working capital finance:

It is a type of loan for business which manages the day to day operations and includes loans like overdrafts, working capital, invoice discounting which are used to plug in temporary cash shortfalls in the business operations, etc. One feature of working capital loans is that the interest gets charged on the amount that is withdrawn, not on the amount that gets sanctioned and approved. In invoice discounting, a discount gets charged by the factoring agency and the balance gets paid to the company. The factoring company has the responsibility to collect the customer invoice.

4. Equipment Finance:

This is where a new piece of equipment is purchased on instalment basis by the business in return for instalments for covering the purchase price. There is also lease agreements where lease rentals paid to the manufacturer cover the cost of the equipment plus the interest costs. Equipment finance can be arranged by the manufacturer as well as by a lender. Aircraft companies generally take equipment finance and lease agreements to acquire aircrafts since the purchase price is massive.

5. Unsecured loans:

These include loan against property and other unsecured loans given by lenders to small businesses for purposes such as office expansion, etc. These are like personal loans. Banks give loan for business specifically to SMEs for their small expansion needs.