A business loan is a financial tool which assists entrepreneurs in managing the financial needs of the company. It plays an important role for start-ups, entrepreneurs and established businesses which are looking to grow or overcome short-term challenges.
However, having one business loan might not cater to the diverse funding needs of different businesses. As such, there are different types of business loans based on the different needs of a business.
Each type of loan has its own set of characteristics about repayment tenure, loan amount, collateral required, interest rate, etc. Hence, it is crucial to secure the right business loan in line with the business’s needs and purpose.
Key Highlights
Let’s look at the different types of business loans available and whom they suit:
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What are the Different Business Loan Products?
Some of the common types of business loans are as follows -
Working Capital Loan
Working capital loans enable entrepreneurs to meet their operational day-to-day needs such as inventory purchase, employee training, managing payroll, purchasing equipment, and other short-term operational requirements.
Some of the features of working capital loans are as follows –
- They are collateral-free loans.
- The repayment tenure is usually short. For instance, Shriram Finance offers working capital loans with repayment tenures ranging from 1 month to 12 months.
- The interest rates are affordable.
- There might be further subdivisions under working capital loans for the specific funding needs.
Trade Finance
Trade finance loans help the business to meet the immediate fund requirements and support trading activities. These loans include invoice factoring, letters of credit and export credit insurance. Trade finance loans, though suitable for any business to meet customer-related expenses, are ideal for businesses engaged in international trade as they offer financial solutions for the export and import of goods and cross-border transactions.
Supply Chain Finance
As its name implies, supply chain finance loans help businesses optimize the cash flow by offering funds through the supply chain, benefiting both the suppliers and buyers. It is suitable for businesses which are involved in the supply chain business and want to optimize their cash flow and smooth business functioning.
Start-up Business Loan
Businesses geared towards start-ups or development, looking for funds to cover product development, initial setup costs, marketing expenses, purchasing equipment and resources, and other related expenses during the initial stages can avail of start-up business loans designed especially for start-ups and developing existing businesses.
MSME Loan
MSME loans are specially tailored for Micro, Small, and Medium Enterprises (MSMEs) to support their specific business expenditures and funding needs, including technology upgradation, expansion, and more. Only businesses that fall under the definition of MSME as stated in the MSMED Act, 2006 can avail of MSME loans.
GST Business Loan
GST business loans are suited for businesses looking for financing products linked to their Goods and Service Tax (GST) payments. It helps to address tax-related financial needs and manage working capital. These loans are offered based on the GST returns of the businesses and the loan amount is decided accordingly.
Shop Loan
This loan is offered to facilitate the purchase of equipment, inventory or other such business-related expenses. This loan product is tailored to meet the operational requirements and inventory management of retail businesses and shop owners.
Business Loans against Gold
Though business loans are generally unsecured and do not require collateral, businesses which can provide gold ornaments or jewellery as collateral can avail business loans against gold to obtain funds for their business requirements. It provides a quick financing alternative for businesses leveraging their gold assets for working capital or other financial purposes.
Loan without Financials
Some businesses which do not have robust financial history or documents face challenges in availing a business loan. For such businesses, a loan without financial history is a good option. It is provided to the borrowers without the requirement of extensive documentation such as bank statements, income tax returns, and audited financial statements. This type of loan considers factors other than traditional financial statements for providing financial options.
Business Loan for Women
Business loans for women are business loan products designed specifically to provide financial support to women business owners and entrepreneurs. This business loan offers funds for several business needs, empowering women-led enterprises.
Factors to Consider Before Choosing the Right Business Loan
There are several points one should take into consideration before choosing the right loan for business. Let’s take a look at some of them in this section:
The purpose of the loan
Clearly define your financial goals and why you need the loan. Avail a working capital loan if you need funds for operational needs. If you want to buy equipment and inventory, opt for a start-up business loan or shop loan to finance it. Defining your loan purpose helps you choose the right loan that matches your business needs
Eligibility
Check if you are eligible for the loan that you want to avail. Different loans have specific requirements. For example, MSME loans are available only for MSMEs. Similarly, business loans against gold are available only to businesses that can provide gold ornaments as collateral. Business loans for women are provided only for women entrepreneurs.
Interest Rates
Compare interest rates offered by different loan providers. Use this research to choose favorable rates to ensure you fulfil your financial requirements by paying less overall interest and saving money on your business loan.
Collateral Requirements
Collateral refers to the assets which you can pledge as security for the loan. Understanding the collateral requirements of the loan is vital. Some business loans, like secured loans, demand assets to secure the funds. If you do not have collaterals to offer, you should opt for unsecured loans which do not require collaterals.
Loan Amount
While availing a business loan, it is wise to borrow only the amount necessary to meet your specific business needs. Assess your specific requirements, create a detailed budget, and identify the amount required for your particular business goals. Borrowing only what you require minimizes the interest expense and helps you to manage timely repayments.
Did You Know?The loan amount depends on your eligibility parameters, like your business's annual turnover over the last 2-3 years, credit score, projected cashflows, etc. While you might require a higher amount, the lender might not offer the same if your eligibility parameters are not very good. |
While this list of factors provides comprehensive insights, it's imperative to tailor your choices according to your business requirements, borrowing costs and repayment capability.
Conclusion
Assess the financial needs of your business and choose a suitable business loan. This will help you get customized financial assistance for your business needs and ensure that the loan is affordable and easily repayable.
For attractive loan offers, explore the range of business loans offered by Shriram Finance. Ranging from short-term to long-term loans, you get affordable interest rates, high loan amounts, and favorable loan terms.
