Every type of commercial business or any startup needs an adequate amount of capital to pay expenses. In order to gain financial assistance from outside, companies take out business loans. A business loan is a kind of financing, one can avail to meet the urgent needs of growing business.
While some business owners use loans to pay for salaries and wages until their new company gets off the ground, other companies put borrowed funds toward office supplies, inventory or business projects. However, one can have a variety of loan options to choose from which suits best for their business.
So let’s take a look at some of the loans which can give you a fair idea about the choices:
A term loan is a loan which is taken for a specific amount with a specified repayment schedule and a fixed or floating interest rate. For example, many banks have term-loan programs that a small business enterprise can take to operate from month to month. Often, a small business uses the cash to purchase fixed assets such as equipment for its production process.
Such loans can be paid off between 5 and 20 years. The loan has a fixed or variable interest rate, monthly or quarterly repayment schedule, and set maturity date. Such type of loan is appropriate for a small firm with sound financial statements.
Invoice financing is often taken by companies to meet short-term liquidity needs based on customer’s unpaid invoices. For example, if a company faces a liquidity crunch then it has the option to go for invoice financing to meet its liquidity requirement. The company can then use the particular amount to pay salary to employees or suppliers, or invest in getting new machinery, etc.
There are many financial institutions like the Receivables Exchange of India Ltd (RXIL), a joint venture promoted by Small Industries Development Bank of India (SIDBI) and the National Stock Exchange of India Limited (NSE) which helps in getting companies invoices financed. Even small business firms must register them on these platforms so that can such services can be taken at any point of time.
Working capital Finance
These loans are taken by firms or companies for covering their daily operational expenses. Such type of loans is usually taken to cover costs such as employees’ wages; accounts payable or other similar operations. Working capital loans are usually taken by organizations which have extremes in their sales cycles and require funds during times of reduced business activity.
Majority of such loans are unsecured, however, loans with high risk need some guarantee. The duration of a working capital loan in India ranges between 6-12 months, while the interest rate ranges anywhere between 12% to 16% depending on the lender. There are multiple modes of disbursal of working capital limits such as letter of credit, letter of guarantee, bills limit, and cash credit.
In the manufacturing business, firms and companies require lots of equipment to carry out their work. However, not every firm has the finances to buy equipment. So here comes the importance of Equipment financing. It helps you to finance up to 100% of the new or used equipment one needs for their business.
Most of the banks offer such types of loans with an upper limit of 25 crore. However, some banks offer such financing products for as high as Rs 100 crore. The tenure for such loans is fixed or it may range between 4-5 years. Interest rates can be lower than term deposits and the equipment is generally taken as collateral, along with some additional security.
Pradhan Mantri Mudra Yojana (PMMY)
This scheme was launched by Union Government on April 8, 2015, for providing loans up to Rs. 10 lakh to the non-corporate, non-farm small/micro enterprises. Under PMMY, all banks whether Public Sector, Private Sector, Regional Rural Banks (RRBs), State Co-operative Banks, Urban Co-operative Banks, Foreign Banks and Non-Banking Finance Companies (NBFCs)/Micro Finance Institutions (MFIs) are required to lend to a non-farm sector and are hence classified as MUDRA loans under PMMY.
Three types of loans are offered under PMMY. These are:
Shishu: covers loans up to Rs. 50,000/- provided with no collateral, @1% rate of interest/month repayable over a period of 5 years
Kishor: covers loans above Rs.50, 000/- and up to Rs. 5 lakh
Tarun: covers loans above Rs. 5 lakh to Rs. 10 lakh
Stand Up India
This scheme facilitates bank loans between 10 lakh and 1 crore to Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and Woman borrower for setting up a Greenfield enterprise (first-time venture), in manufacturing, services or trading sector. In case of non-individual enterprises, at least 51% of the shareholding and controlling stake should be held by either an SC/ST or Woman entrepreneur.
The loan is completely secured by collateral security or guarantee from Credit Guarantee Fund Scheme for Stand-Up India Loans (CGFSIL). However, a little amount of security is required.