Different Types Of Business Loans
Introduction - What is a Business Loan?
A business loan is a type of secured or unsecured commercial loan. It is offered to entities by lending institutions for business purposes.
Why do you need a Business Loan?
While operating any business, whether big or small, you need funds to carry out its day-to-day operations. Your business operations will range from leasing a shop, purchasing raw materials to buying a factory or machinery equipment. All of this involves funding. Your business needs financing at every phase. It involves huge capital expenditure. So how do you get through it? Availing of a business loanwill help reduce the financial strain you’ve been carrying towards acquiring capital. It can help you fund your business in an easy, quick manner.
Types of business loans: What are they?
Based on the nature of your business, you will require funds for its growth and expansion. Your capital needs vary depending on the nature and size of your business activities—that is, whether it is a big or small industry or, whether it is capital or labor-intensive, or whether it is in the stages of inception or expansion.
These factors play a crucial role in ascertaining the kind of business loan you need. You must select the type of business loan that’s best suitable for you. Let us have a look at some of the types of commercial loans. These are:
Working Capital Loan:It is a type of advance where businesses can use the working capital loan to run their day-to-day or short-term operations. With this type of loan, you can cover your daily business expenses such as purchasing raw materials, investing in machines, looking after inventory costs and payroll. It is ideal for Small and Medium Enterprises (SMEs) as they need funds to manage their daily expenses.
Term Loan (Short & Long term): Term loans are helpful if you want to use them towards capital expansion. They can be short-term or long-term. Depending on your business requirements and the nature of the loan .i.e. secured or unsecured, the tenure of term loans can extend from 1 year to 10 or 20 years. Term loans can be secured or unsecured.
Overdraft Loan: It is a type of facility offered by the bank—where the borrower can withdraw cash from the account within the sanctioned limit. This limit is revised every year and depends on factors such as the borrower’s credit and repayment history, its relationship with the bank, and its cash flows. In an overdraft facility, your bank will charge you interest only the amount you’ve utilized.
Equipment Finance: It is a type of loan used to purchase new equipment for large-scale enterprises. It is suitable if your business is involved in manufacturing—as this entails a high loan to fund machinery that’s expensive.
Letter of Credit: It is a document issued by the bank which guarantees full and timely payment to the seller. In case of non-payment, the bank makes payment to the seller on behalf of the buyer.
Point-of-Sale Loans: Point-of-Sale loan, also referred to as Merchant Cash Advance, is a type of lending offered by business owners to their suppliers. It is a type of funding option for a small business, where they receive an advance against their everyday sales. Thus, you can repay the loan based on your day-to-day sales.
You must fund your business operations to keep them ongoing. It is essential is that you select the type of loan that is suitable for your business. It helps in maintaining your cash flows and covers your day-to-day expenses.
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