Five Types of Business Loans Available in India

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A business loan comes handy when you want to start a new business, expand an existing one, or handle any cash flow problems. Every company goes through capital gaps at some point in time, and regular cash crunches can break your business if you don’t pay attention to infusing capital at the right time.

There are various types of business loans available, out of which you can choose the one that fits your purpose.

  1. Demand Loan

Demand loans are usually taken to overcome a short period of a cash crunch. They can be secured or unsecured and are available at excellent pricing as compared to some other business loans.

The purpose of these loans is to fill short term capital gaps. The lender can recall a demand loan at any point in time. The borrower has to repay the loan amount irrespective of the time of lending. The recalling time also depends on the lender’s policy on which the loan was granted. The most extended term for a demand loan is 12 months.

  1. Term Loan

You should go for a term loan if you want to invest in assets like machinery, land, building, etc. You can finance construction, renovation, infrastructure creation, property, purchase of a building, refurbishment, purchase of machinery, equipment, vehicle, and capital infusion with a term loan.

A term loan has a fixed monthly or quarterly repayment schedule. The interest rate may either be floating or fixed. Generally, the most extended term for a term loan is three years (if it is an unsecured loan) and 15 years (if it’s a secured loan). The amount of the loan differs according to your needs and eligibility.

  1. Loan Against Shares

If you have invested in any security like Demat shares, mutual funds, insurance policies, fixed maturity plans, saving bonds, and exchange-traded funds, you are eligible to avail of a loan against them to meet your financial needs.

Though there are various funding options in private limited company, the loan against securities is not specifically for business purposes. You can use the amount for any purpose. You need to renew the tenure of these loans every year. However, you can only pledge those shares, insurance policies, and mutual funds to raise funds that are approved by the NBFCs.

  1. Cash Credit Facility and Overdraft Facility

The cash credit facility is a loan granted as an overdraft on the security of the borrower’s stock in trade/raw materials/processes. You can secure a cash credit facility by pledging your current business assets, such as receivables or inventory. Limit on cash credit withdrawal is based on your drawing power, which is calculated after deducting the margin fixed by NBFCs over the stocks. Financial institutions always ensure that the balance outstanding is lesser than your drawing ability. The tenure for this loan needs to be renewed every year. 

On the other hand, a NBFC overdraft is a facility where the NBFC allows you to withdraw money from your current account with a balance below zero. This withdrawal is allowed up to a specified limit. This limit is predefined by the NBFC based on the securities pledged by the customer/ account holder or their repayment capacity. The NBFC has all the right to ask for repayment of the money.

  1. Letter of Credit Facility and NBFC Guarantee

A letter of credit is a type of credit facility where a NBFC provides a letter to the seller, assuring them that the seller will receive the payment on time for the correct amount. And if the buyer is unable to make payment for the purchase, the NBFC assures to cover the entire debt on certain conditions.

LC facility is used in various international as well as domestic trade transactions to ensure sellers receive payment on time from the buyers even if they are residents of different nations and do not know each other in person.

You need to pledge capital assets and inventory for receiving the letter of credit. Based on your profile, the margin varies between 60 to 80% of the assets. Just like a term loan, the tenure of LC is renewed every 12 months.