8 Types of Different Business Loans – How to Find Your Ideal fit?

There are numerous reasons why a business would need money. Thankfully, with the increase in non-banking financial institutions, fintech companies and other lenders, businesses have numerous financing options to get the job done.

The access to funds has enabled many small and medium businesses to confidently run their businesses without fear of “running out”. These lenders provide business loans to fund day-to-day requirements, expansion, growth, innovation, and diversification of trajectory.

If you are a business owner looking for a loan to run, expand, or grow your operations, you can choose from one of these eight types of business loans:

Types of business loans available in India

Depending on the purpose of disbursement, business loans are known by different names. However, they can be broadly classified under these eight categories:

• Term loans

Term loans can be of short term, medium term, or long-term. Their tenure ranges from about a year to five years, depending on the terms of the lenders. Banks and financial institutions offer different types of term loans to businesses at a fixed interest rate for an agreed tenure. They are secured and affordable loans.

Businesses can use these term loans to buy new machinery, expand their business, diversify their products, buy raw materials, etc. They can use this for the overall development of their business.

• Cash credit

When you want quick cash to carry out daily operations, you can opt for cash credit. This is a simple type of working capital loan. The lenders fix different credit limits for borrowers based on their current liquidity and future orders from customers.

Borrowers can withdraw funds to the maximum of this credit limit, and can use this to cover their daily operations. This loan is quick, flexible and carries interest only for the amount withdrawn and not for the entire credit limit.

• Overdraft

This is almost similar to cash credit, with the only difference being banks involved here. Banks and financial institutions require collateral from you to allow you to withdraw funds in excess of what’s there in your bank account.

They charge you a reasonable interest rate for these excess withdrawals. Overdrafts are quick to access, and they are quite flexible as well. If you provide proper collateral, you may get an attractive interest rate for your overdraft loans.

• Letter of credit

When your business deals with international trade, you can make use of a Letter of Credit (LoC) to process your transactions smoothly. The LoC is a system where your bank or financial institution takes up the guarantee for your transactions, thereby assuring your suppliers/exporters of prompt payment.

A LoC lends credibility to international transactions and mitigates the risk involved. Letters of Credit are affordable and effective types of business loans.

• Business loan against property

This loan comes in handy, if you require funds for expansion. As the name indicates, this is a type of loan where banks and financial institutions provide loans against your collaterals. Collaterals are usually residential or commercial properties, in this case.

These are secured business loans. Therefore, they come with longer repayment tenures and reduced interest rates, making them a good choice of funds for you, especially if your requirement is huge.

• Gold loan

As the name suggests, banks and financial institutions provide you with loans against collateral, which is in the form of gold or bullion only. Gold loans are easier to access than business loans against property. Their disbursal process is quick and hassle-free, making them a good choice for small businesses looking for quick cash.

• Factoring

If you urgently need working capital to run your business’s day-to-day affairs, you can resort to factoring. Here, where you sell your invoices to a factor. Usually, banks or financial institutions play a factor role.

They buy your invoices and provide you with a loan that matches your future receivables. This way, you can use your idle invoices to increase your liquidity. Factors will then contact your customers and collect the outstanding payments from them.

• Unsecured business loan

If you don’t have any collateral for a secured business loan, you can opt for an unsecured business loan for quick funding. Lenders check your financial health and credit history before sanctioning a fixed loan amount for you to be repaid within a specific tenure.

However, due to their soaring interest rates, unsecured loans are a risky proposition. Also, many private lenders may come into play in these types of loans, making it a lot riskier for borrowers than in the case of secured bank loans.

Determining the right business loan for your needs

With so many types of business loans available at your disposal, how do you know which is the right fit for you? 

• Assessing your business needs and goals – Why do you need the loan? You have to have a clear answer to this question, as this will help you choose the right type of loan from the right lender.

• Evaluating loan terms and conditions – When checking for business loans from different lenders, you have to evaluate their repayment terms, interest rates, hidden costs (if any), and other terms & conditions in fine print. This will help to avoid unnecessary surprises later. You should know what you are getting into to be safe than sorry.

• Understanding interest rates and repayment options – Check with the lenders about their interest rates and repayment options clearly before getting a business loan from them. Check for the terms in case of defaults thoroughly, before opting for such loans.

What are the factors to consider when choosing a lender?

Today, you will find many types of lenders when opting for a business loan – banks, financial institutions, private lenders, online lenders, credit unions and more. How to choose the right lender? The three points to remember in this case are:

• Comparing interest rates and fees – Check all the fixed and variable interest rates, processing fees and other hidden costs of business loans charged by the lenders to choose the lender that charges you the least.
• Reputation and customer service of lenders – Always choose lenders that have been in the lending business for a long time. Check their reviews online and read customer testimonials to get borrowers’ feedback before selecting the right lender.
• Additional services and support offered—You should choose lenders who are available 24/7. They should also assign a representative exclusively for you to ensure you get a loan that is customised based on your needs.

Conclusion

With so many types of business loans and lenders available in the market, it may be a challenge to choose the one that is right for you. But TallyCapital enables you to sail through the business loan process successfully. With our streamlined lending process and strategic partnerships, this puts you in a position where you can easily access the financial support you need, while keeping you on what you do best – growing your business.