9 Types of Business Loans You Need to Know

As we all know that business loan from banks is required by businessmen to meet its business requirements which may be an expansion of business, setting up of business, meeting working capital requirement and so on and so forth.

In this write-up, we are trying to discuss various types of Business loan in India. Most common types are as mentioned below:

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  • Overdraft facility or OD limit

Overdraft facility or OD Limit is the most popular form of business loan in India. In this, businessmen get a facility to withdraw a larger amount from his account than his actual balance to meet his day to day business needs. Normally, interest is charged only on overdrawn account. This provides facility to businessmen to borrow only when required.

  • Term Loans

These are another popular form of business loans wherein the businessmen can take money for a fixed tenure. These may be secured or unsecured and normally used for acquiring fixed assets. Depending upon tenure of repayment, these may be short term or midterm or long term in nature. Further, the rate of interest can be fixed or floating.

  • Loan against securities

This is another way of arranging finance by businessmen wherein financial securities are mortgaged to get a business loan like a mortgage of Insurance policies, mutual funds, shares, savings bonds, etc.

  • Business loan in form of Bill Discounting

This is again a very common and very popular form of financing for businessmen. In this system, on the basis of credit sales invoices, banks provide instant funds to businessmen and charge some commission for same. In this way, businessmen get instant cash instead of waiting for a credit period of 40-45 days and even more.

  • Letter of credit facility or LC facility

This type of financing is quite popular in international trade or when high-value items are traded between interstate.  In this, since buyer and seller are lesser known to each other and are in different geographical location, bankers of both buyer and seller provided kind of guarantee for international trade transaction. Here, the buyer banker provides a guarantee to a seller for timely payment on the basis of transportation documents, insurance papers, invoice, and other legal and commercial documents. Accordingly, in case of any default in payment by a buyer, the bank is liable to pay to the seller.

  • Cash credit facility or CC Limit

This is another type of overdraft facility where a working capital requirement of businessmen is met by mortgaging current assets like debtors, stock, etc. as collateral. Here, the bank fixes the stock margin and maximum amount of loan depend upon such margin. Such loans need to be renewed every 12 months.

  • Bank guarantee

As the name suggests, under this type of financing, banker provides a guarantee to third party or stakeholder that in case of default by businessmen or borrower, losses would be borne by the banker.

Normally, such loans are secured i.e banks provide such guarantee against collateral security of businessmen in terms of residential or commercial or industrial property.

  • Business loans for women

In order to encourage women entrepreneurs, most banks and NBFCs offer special business loan schemes with attractive interest rates, discounts, etc. Same may be availed by both existing and new women entrepreneurs.

  • Demand loans

These are short duration loans for a maximum period of 12 months which need to be renewed at end of terms and need to be repaid on demand i.e as and when banks and financial institutions recall it. It can be both secured as well as unsecured and suitable for short term financial needs.

Thus, it can be seen from above that there are various options available to businessmen when it comes to opting for business loans.

Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.