Types of Business Loans You Must Know About - Business Loan Blog - Tata Capital

4 Types of Business Loans You Must Know about

Mar 06, 2017

Every promoter wants to grow and expand his business. There may be a situation when owners require urgent funds to grow their companies. Opting for a loan facility from a financial institution may be beneficial to meet these fund requirements.

Before deciding to avail of a loan, it would be advantageous to know the different types of loans that are available. Here are four types of loans that are commonly available for business owners:

  1. Working Capital Loans
    This type of loan is required by companies to meet their regular operating expenses. Having sufficient working capital is vital for the survival of any business. These loans may further be classified as:
    • Secured loans: These are available by offering lenders some kind of collateral, such as equipment, accounts or other security. Based on the value of the collateral, the lender approves the loan amount.
    • Unsecured loans: Such loans are offered without taking any security. Most companies find it difficult to avail such types of financial arrangements.
  2. Term Loans
    Term loans are available both for the short term as well as for a longer period. The tenure on short-term financing may extend up to three years. Long-term loans may vary between 10 and 15 years. Most companies use these facilities to fund expansion plans or set up new facilities. Term loans are repaid through monthly installments and often have competitive business loan rates. Well-established companies with a track record often find it easier to avail term loans.
  3. Overdrafts
    This is temporary financing available for business owners available against their current accounts. Based on the agreed terms and conditions, the holder is allowed to overdraw beyond the available funds in the current account. In case the overdraft exceeds the sanctioned limits, the lender often charges a higher rate of interest.
  4. Start-Up Loans
    Several financial institutions offer an SME (small and medium-sized enterprises) loan for start-ups. This type of financial arrangement is available for entrepreneurs with an exceptional business plan and revenue model. Generally, the lenders require some collateral to finance start-up ventures. The institutions analyze the credit history of the entrepreneurs, educational background, the feasibility of the business plan, and the assets and liabilities of the promoters before sanctioning the loan. Several special programs and schemes are available for start-up ventures to fund their businesses.

Every entrepreneur understands the importance of having sufficient funds to sustain the business. Additional capital required to take the venture to the next level may be funded through an institutional loan. Indian business owners may choose from different types of loans offered by the lenders based on their specific requirements.