Funding is the backbone of any business enterprises. One of the sources of funding is Business loans. There are different categories of business loans like secured loans and unsecured loans. As the name suggests, secured loans are taken against mortgage of some securities like against mortgage of immovable property or plant and machinery or stock or debtors etc.
Unsecured Business loans are those loans which are without any security. Business loans are required by every entity whether big or small as well as each stage of growth cycle of company like start up stage or growing stage or developed stage etc.
Banks and NBFCs are biggest source of business loans in India. The purpose of taking business loan are normally 2 fold. First is for meeting working capital requirement and second is for purchasing capital assets like plant and machinery etc. Second category of business loans are called as term loans.
Normally, in case of companies engaged in manufacturing and trading requires both term loans and working capital loans where as companies engaged in service industry normally requires working capital loans.
There are different types of business loans available in market as given under:
Term loans are that type of business loans where fixed term is set for repayment. It may be short term, mid term or long term loans. Term loans may be secured term loans or unsecured term loans. Normally, term loans have period between 3 years to 15 years depending upon amount and purpose of loans.
Overdraft Facility or Overdraft
When the banks provide facility to businessmen that they may overdraw from their current account i.e in excess of their bank balance, it is called as overdraft facility or Overdraft. This is normally considers as working capital loan and is very popular form of business loan for every businessman. This is because overdraft gives facility of drawing more money than actual balance in the bank. If the amount withdrawn is within limit as agreed between both parties, interest will be charged as per agreement. However, in case, amount is withdrawn in excess, higher interest will be charged.
Bill discounting is another popular source of business loan. In this process, businessmen go to banker with copies of invoices/bills and asked for instant cash against those bills receivable in future. Banks in return, provide instant cash to businessmen for fixed commission charged for such facility.
Letter of Credit
Letter of credit is another form of business loan which is very popular in case of international transactions i.e import sale and export sale. Here, bankers of both buyer and seller are involved in financial transactions. Since international buyer and seller are unknown to each other, Letter of credit becomes a safe instrument since financial transactions are routed through bankers of both countries and provide some security to both buyer and seller.
Loan against Property
Loan against property is a secured business loan wherein businessmen mortgage his or her property to bank and get loans for both meeting its working capital requirement as well as term loan requirement. Normally, banks give finance of 50% to 60% of market value of property as loan. Loan against property is quick way of finance for Small and Medium Enterprises (SMEs).
Unsecured Business Loan
As the name suggests, unsecured business loan means business loan without any security. Here, bankers provide business loan on basis of turnover of the company, profile of borrower, number of years of existence of business and high CIBIL score. Since these loans are unsecured, unsecured business loan carries higher rate of interest as compare to secured business loans. The purpose of loan can be both for working capital purpose as well as for financing some machinery and equipment.