Four types of business loans explained

A business needs financing to grow, whether for daily cash flow, expansion or equipment purchase. Being aware of some of the common sources of business finance can help you tackle your monetary needs quickly and decisively. Here’s a look at the four main types of business loans:

1. Flexi business loan

• This loan gives you access to the maximum amount that you are eligible for up to a limit of Rs. 50 lakh. It also allows you to withdraw multiple times from a sanctioned limit as per your needs and pay interest only on the amount used.
  
• Say you manufacture school uniforms, and your need for finances depends on the season. You get approval for a Flexi business loan of Rs. 50 lakh in May. This month you need to purchase knitting machines costing Rs. 6 lakh for sports jerseys and sweaters for the winter season. You can withdraw this amount from the loan limit and pay interest only on this sum. Say you need to outsource the production of children’s socks in August due to a shortage and need Rs. 1 lakh. You can get it immediately without making multiple loan applications. Now you will pay interest on Rs. 7 lakh out of the total sum of Rs. 50 lakh.
• Thus, this loan not only helps you finance unpredictable or seasonal needs but also saves you from paying extra interest on unutilised funds. You can choose only to pay your interest component as EMIs, making cash flow management easier. You can pay off your principal at the end of the tenor when you receive the payment. This loan also allows you to part-prepay funds when you have them to reduce your interest and re-avail the same sum when you need funds. Thus, it is perfect for small businesses that require flexibility in finances.
  

2. Working capital loan

• This is a customised loan option designed for business owners who want to specifically finance their working capital needs.
• A school uniform manufacturer, for example, could find that the cost of raw material has increased due to a shortage of cotton mix yarn. Insufficient working capital, in this case, would hinder production and impact revenues negatively.
  
• A working capital loan can thus help you source everything you need to keep your business running, be it needed inventory or other operational expenses. The advantage of this loan is that is sanctioned quickly to finance urgent needs and does not require any collateral. It helps you protect your current assets from liquidation while keeping your business running during a slump. This loan also features simple eligibility criteria and an easy application procedure.

Additional read: What is working capital?

3. Machinery loan

• A machinery loan is a customised means of financing equipment or machinery, whether to lease, buy, upgrade, repair, transport or install machinery. You may even use it to train your workforce to use and maintain specialised equipment.
• Whether you are expanding your operations or require the right machines for a large order, this loan helps you take care of it. Taking the same example of a school uniform manufacturer, this loan can fund the purchase of Singer universal sewing machines, automatic zig-zag machines, overlock machines, and equipment like industrial pressing irons, cutting tables and industrial scissors.
  
• It helps you acquire important assets for your business without pledging any collateral. Using this loan, your firm can meet increased demand and boost productivity. This loan also features a flexi loan facility, which helps you finance equipment in instalments, based on business needs.
  

Additional read: Requirements for a business loan

4. Business term loan

• This term loan with simple eligibility criteria allows you to borrow up to Rs. 50 lakh. It offers a flexible repayment tenor at a nominal interest rate. Though term loans are usually secured and unsecured, a business term loan is normally unsecured. This saves you from having to attach personal or business assets as security.
• A school uniform manufacturer could use a business loan to pay off textile or equipment suppliers when his receivables are delayed or use it to meet distribution costs when revenues are lean due to price subsidisation. He can also use it to pay his workers when sales are slow.
• There are no restrictions on the use of a business loan. This loan also allows you a Flexi loan facility so that you can pay off unexpected expenses without hassle. It has many other benefits like quick processing and fast disbursing of the funds.
  

Since a cash need may arise at any time, do your research and stay prepared by understanding the various types of loans that you can take advantage of. This will help you fulfil your immediate needs for funds and ensure that you can repay the loan easily and conveniently.

Additional read: Benefits of a business loan from Bajaj Finserv