If you’re looking to start a business, but don’t know how to secure the right type of funding, don’t worry – because there are a lot of people in the same boat as you. This article can shed some light on the different types of business loans so that you can choose the one you need based on your own personal requirements.
- Term Loan: This is the most basic and most popular source of business financing. Term loans can be taken for different tenures to provide different types of funding depending on the requirement. Interest variations depend on the term of the loan being taken – whether it is a short-term, medium-term, or a long-term loan. The loans also vary based on their secured or unsecured nature – secured loans generally carry a lower rate of interest as there is usually a land, building, asset, or other valuable placed as collateral to protect the bank against a potential default. Depending on the requirement for funding in terms of the time required to spend the funds for the establishment or further development of the business, business owners and entrepreneurs choose the loan tenure and negotiate a workable interest rate with the bank. Almost all major banks offer term loans for businesses.
- Letter of Credit: These aren’t really identifiable as traditional loans, as they do not involve the direct transfer of funds with a steady repayment plan to one party. These are most commonly used in international trade scenarios where the buyer and seller don’t ever meet or know each other. Business transactions are facilitated using letters of credit based on the banks creditworthiness. The bank is the entity that facilitates this type of trade.
- Bill Discounting: This isn’t so much a loan as a way to reduce running business expenses. The bill discounting process involves the entrepreneur receiving instant cash benefit on the purchase of a large amount of goods, or credit sales that have been made when discounting purchase or sales bills at the bank. For the sake of authenticity, documents like truck/railway/ship receipts, bills of lading, trade invoices, etc. are required to be submitted.
- Overdrafts: A good source of funds for running capital and small amounts of short-term credit, overdrafts work by allowing the bank account holder to withdraw a higher amount than is present as a bank balance in his / her account. Interest is only charged on the amount exceeding the existing balance, and is usually very affordable if the total amount withdrawn is under the maximum agreed overdraft amount.
- Special schemes for female entrepreneurs: Almost all the banks and NBFC lenders are jumping on the bandwagon of lending to female entrepreneurs who seek funds to start / develop their own businesses and start-ups. It must be noted that these schemes are usually exclusive to female customers, and are offered at negligible interest rates. It’s not just finding that banks provide under these schemes – there are also training programs, counseling sessions, business analysis meetings, case studies, demographic studies, etc. in addition to marketing opportunities for the product or service intended to be sold by the female entrepreneur. Another very important point to note here is that these schemes cannot be availed by business concerns in which the majority of the shares (at least 51%) are not owned by women.