For many entrepreneurs, understanding the variety of available financing options and choosing the right one can be as important as the business model itself. From managing day-to-day operations to funding expansion plans, the right type of Business Loan can play a vital role in a company’s success. So before thinking, how to apply for a Business Loan, read this article to learn about different types of Business Loans in India.

What is a Business Loan?

A Business Loan is a financial tool designed to meet a business’s funding needs. It provides capital that can be used for various purposes, such as expanding operations, purchasing equipment, increasing inventory, or even managing cash flow. 

Business Loans come in various forms, including lines of credit, term loans, and even invoice financing, each tailored to different business requirements. By providing the necessary funds, these loans help businesses maintain growth without stressing their current resources. This makes them an essential tool for both growing and established enterprises that are thinking of scaling their operations or bridging financial gaps.

This blog explores the seven types of Business Loans available in India, helping you figure out which one aligns best with your business needs.

Also Read: Udyam Registration Certificate and Its Benefits for MSME

1. Term Loans

Term loans are one of the most common forms of business financing, where you receive a lump sum of cash upfront, which is then repaid with interest over a predetermined period. These loans are divided into short-term, medium-term, and long-term loans based on the duration of the loan.

• Purpose: Ideal for long-term investment in business growth, such as purchasing real estate or heavy machinery.
• Features: They often have fixed or variable interest rates and a scheduled repayment plan.
• Benefits: Term loans help maintain cash flow and budgeting due to predictable repayment terms.

2. Working Capital Loans

Working capital loans are designed to finance a company’s everyday operations. They are not used to buy long-term assets or investments but to cover accounts payable, wages, etc.

• Purpose: To finance the everyday operational needs of a business.
• Features: Shorter repayment period and usually require collateral.
• Benefits: Enables businesses to continue operations even when earnings are low.

3. Overdraft Facility

An overdraft facility allows a business to withdraw money from its current account, even if the balance is zero. The bank sets the limit, and interest is charged only on the amount utilised.

• Purpose: To provide immediate funds and liquidity to businesses.
• Features: The facility comes with flexible repayment terms, and interest is charged only on the overdrawn amount.
• Benefits: It is quick and convenient, offering immediate liquidity without a fixed repayment schedule.

4. Invoice Financing

Invoice financing allows a business to borrow money against customer payments, helping businesses improve cash flow, pay employees and suppliers, and reinvest in operations.

• Purpose: To bridge the cash flow gap between billed work and payments received.
• Features: Based on the creditworthiness of the borrower’s customers.
• Benefits: Provides immediate working capital by unlocking funds tied up in outstanding invoices.

5. Equipment Loans

Specifically designed to fund the purchase of equipment necessary for the business, equipment loans are secured by the equipment itself, which serves as collateral for the loan.

• Purpose: To purchase business equipment like computers, machinery, or vehicles.
• Features: The loan amount is usually aligned with the value of the equipment.
• Benefits: It allows businesses to get their necessary equipment without paying the total price upfront.

6. Microloans

Microloans are usually provided by microfinance institutions and are aimed at micro and small businesses that need small amounts of funding.

• Purpose: To support start-ups and small businesses’ instant financing needs.
• Features: Smaller loan amounts with relatively lenient repayment conditions.
• Benefits: Accessible to businesses with limited collateral or credit history.

Also Read: Business Finance: How to Get Business Financing in India

7. Government Subsidised Loans

These loans are provided by the government to support businesses in various sectors. They often come with favourable terms, such as lower interest rates or easy repayment schedules.

• Purpose: To support businesses in priority sectors or those contributing to the economy.
• Features: Subsidised interest rates and government backing.
• Benefits: Reduces the financial burden on businesses, making essential projects feasible.

Being aware of the different types of Business Loans available in India can empower you to make informed decisions that align with your business strategy and financial requirements. Each loan type offers unique benefits and is suited to specific business needs, from managing day-to-day expenses to funding large-scale expansion projects. By choosing the right loan, you can ensure your business has the financial support it needs to grow in today’s competitive environment.