Any business in the world continues and thrives as long as it has a constant healthy cash flow. No matter what the size of your business is, every business faces the shortage of funds at some point in time. Based on the size, viability, and nature of a business, business owners can raise money from the market. If someone doesn’t want to or can’t raise the money from elsewhere in the market, a business loan can be the best option for starting or expanding a business.
However, before applying for a business loan, you must know about the types of business loans, so that you can get the right business loan based on the requirement of your business.
Various types of Business Loan
While business loans can be divided into multiple categories, here are the most common business loans:
- Overdraft loan:- Overdraft is a credit facility offered by a bank to a current account holder to withdraw money up to the approved limit. The overdraft limit is based on some collateral or securities such as property or other financial assets or credit history of the business, banking relationship, etc. The overdraft amount can be accessed based on the financial requirements of a business and the bank charges interest only on the used amount. Based on an individual’s credit history, the overdraft limit can also be used for personal purposes.
- Working capital loan:- Working capital loans are extended for business owners specifically for their regular working capital needs. This type of loan is offered against collateral and has lower interest rates than an overdraft. The loan can be obtained to finance a company’s daily business operation. For example, a footwear company gets a huge order from retailers with some advance payment. However, this payment is not sufficient to buy raw material and pay workers. The insufficient fund, in this case, hampers the production, and the business may suffer. A working capital loan can help the footwear company to finance its operation. Working capital loans help the manufacturer to keep its business going smoothly. This kind of loan is very helpful in running your business during a cash crunch. The working capital loan is sanctioned immediately and against the purpose of a business. The lender monitors the order book of the business with its debtors, receivables, cash flow, inventory and a lot more. The bank checks the financial status of the business regularly.
- Term loan:- Term loans are obtained for the purchase of long-term assets. This is an EMI-based loan for predefined tenure. The loan can be used for financing land, building, infrastructure creation, and purchase of machinery, vehicles, and equipment. The term loans are offered for a longer tenure for larger loan amounts. Interest rates applicable to this loan is relatively low. While eligibility criteria for term loans can be a bit strict, this type of loan can prove very helpful for businesses looking to buy property or inventory.
- Loan against security:- If you have invested in any financial securities like mutual funds, fixed maturity plans, Exchange Traded funds (ETF), savings bonds, and insurance policies, you can avail business loans against them. Financial securities can be pledged to raise funds for your business requirements. Only financial securities like mutual funds, ETF and insurance policies that are approved by banks can be pledged to get business loans.
- Lines of credit:- It is one of the most popular business loans. In a line of credit, you don’t need to withdraw a lump sum amount upfront. Borrowers can access the amount whenever they need as per their convenience. Line of credit works like a business credit card. It is a good option for a small business in need of urgent cash. The rate of interest on a line of credit is also low.
- Letter of credit:- Letter of credit is a payment instrument wherein a bank provides the monetary guarantee to the seller. A letter of credit acts as an assurance that the buyer will pay the seller on time for the agreed amount. If the buyer fails to make the payment for the purchase, the bank will be responsible to make the payment as per terms and conditions. Letters of credit are used for both import and export businesses to ensure sellers receive payment on time. Letter of credit assures unknown suppliers oversea of payment before any transaction. You need to offer inventory and capital assets for getting the letter of credit. The tenure of a letter of credit is renewed every 12 months.
Documents required to get business loans
Documents requirements may vary from lender to lender. Here are the common documents needed to get a business loan.
- Age proof: Passport/ PAN Card
- Proof of Identity: Self-attested PAN Card/ Passport/ Aadhaar Card/ Voter’s ID/ Driving License
- Address Proof: Utility Bill/Postpaid Phone Bill/ Voter’s ID/ Passport/ Driving License/ Aadhaar Card
- Proof of business continuation for at least 2 years
- Income proof: Bank statements with regular cash flow for the last 2 years
- Salary payment for 2 years.
- Audited Balance Sheet along with financial statement, profit & loss statement and ITR for last 2 years
- Incorporation/Registration or Partnership/Trust Deed, etc.
- Self-attested photocopy of company PAN card
- For business in partnership: Partnership agreement /MOA, AOA and certified copy of Board resolution