Learn Trading Under The Guidance of Vivek Bajaj + 4 Mentors - Know More

Types of Loans

Business Loans

Moving on to commercial lending and borrowings, let us discuss 'Business Loans.'


Operating a business is not easy and may often require funds that the business owners may not have. Business loans have been designed to help businesses run smoothly and give them the opportunity to grow. 


Businesses can have varied needs – from financing day-to-day operations to purchasing machinery and land. Fortunately, a variety of business loans are available in India to finance specific business needs. 


Let us take a look at each of them:


Types of business loans



Term loans

This is the most common and basic kind of business loan. They are highly flexible and depend on the specific requirement of the business.

  • Term loans can be secured and unsecured. 
  • They are given based on the business’ credit history. 
  • Term loans can be short term or long term. 
  • The funds are disbursed as a lump sum amount. 

Most businesses use term loans to finance capital expenditure such as purchasing a piece of heavy machinery or buying a factory or land. 


Working capital loan

These are small business loans extended to businesses to meet their working capital requirements. Every business needs cash flow for meeting its day-to-day expenses. This loan helps businesses cope up with the shortfall during the offseason and meet demand during the peak season. Almost all businesses need working capital loans. 

The loan amount varies depending on the size of the business and requirement. Since they finance short-term requirements, working capital loans are usually short-term loans. 


Invoice financing

Also known as invoice discounting or invoice factoring, this type of funding helps to fund the time between raising an invoice and receiving payments from clients. They are ideal for small businesses who get an instant cash flow in the meantime. Lenders finance up to 80% of the invoice amount. Once the business receives the payment of the invoice, they can repay this loan.  


Overdraft facility/Line of credit

Banks can provide overdraft facilities to businesses to use as per their business requirement. They may be backed by a collateral like a fixed deposit or can be solely granted on the basis of the financial track record of the company. Almost all businesses, big or small, benefit from these overdraft facilities. A limit is set in the business’s bank account and the business can withdraw the amount as and when required. The good thing is that businesses only have to pay the interest on the amount withdrawn and the time period for which it has been withdrawn. The fund can be utilized for any purpose. 


Equipment financing

This loan is specifically made to help businesses acquire machines to carry out their operations. Machines can be very costly and can cause a significant dent in a company’s finances. Instead, taking a loan from a bank/NBFC and paying it back through EMIs is a more feasible option. The interest rate for these loans can be quite low, making it a viable option for businesses. 


Start-up loans

This is the generation of start-ups, isn’t it? Thanks to start-up loans, anyone can start a business. Since such businesses are new and do not have a credit history, the owner’s credit history is taken into account by the lender while evaluating the loan application. However, the businesses current or projected turnover figures or other financials are considered while deciding the interest rate, the loan amount and the tenure. 

Instead of taking the entire loan as a lump sum amount, borrowers can also get a pre-approved amount and withdraw the funds as and when they require it. That way, they end up paying the interest only on the withdrawn amount and not on the entire approved loan amount. 


Loan against property for businesses

Some banks and NBFCs offer loans against property for businesses which require a high amount of loans. The owner of the business can mortgage his/her property to avail funds. The property can be residential or commercial. The mortgaged property has to be free from litigation and any other legal issue. This kind of loan can be short term or long term depending on the need of the borrower.


Business loans for women

These are special finance schemes to encourage women entrepreneurs and give them a strong foothold in the industry. These loans are flexible and are ideal for small to medium enterprises. The interest rates are also quite low and processing is done fast.  These business loans can help women to take their first steps in the business world.


Advantages of taking a business loan

  • Business loans provide funds to businesses whenever they need them. Be it in the form of term loan or working capital loans, business loans help businesses stay afloat, continue everyday operations, think of expansion and help them grow. 
  • If used smartly, business loans can be very profitable. By using the fund as and when you need, you can reduce the amount of interest paid on the loan, thus making the loans work for you. 
  • As we have seen earlier, there are a variety of business loans available with flexible repayment options. There is something for every business – a reason why business loans have become so popular. 
  • Business loans help business owners stay in control of their businesses. Having funds in your hand will help you make better business decisions and think about the future of the company, without worrying about funds. 

Ready to master finance fundamentals? Enroll now in 'A2Z Of Finance: Finance Beginner Course' and start your learning journey today!

Did you like this unit?

Units 10/12