All types of businesses require constant funding for smooth operation, expansion, and growth. Businesses can’t rely on internal finances all the time. Business enterprises with good credit scores, repayment history, and profitability can get business loans at attractive interest rates.
Working capital loans, cash credits, overdrafts, letter of credit, invoice financing, term loans, and machinery loans are some of the types of business loans.
The tenure of repayment varies between 3 months and 5 years and it depends on the type of loan. The interest rates can range from 8% to 36%. The businesses can borrow business loans depending upon their nature of requirements.
We present here a comparative study of the 10 most popular types of business loans to help you to compare, analyze and choose the best.
The data represented here are the general practices followed in the industry. The readers are advised to check the official websites and product catalogues of the lenders at the time of applying.
Types Of Business Loans
| Type Of Business Loan | Nature | Purpose | Interest Rate Per Annum | Repayment Tenure | Fees And Charges | Other Important Terms And Conditions |
| Term loan | Secured or Unsecured Long term sometimes Short term | Meeting capital expenditure | 10% to 25% | 1 to 5 years if secured.15 to 20 years if unsecured. | Processing fees from 2.5% to 3% of the loan amount,Foreclosure charges from 3.5% to 4.75% of the outstanding. | Generally secured by an underlying asset. |
| Start-up loan | Unsecured Short term or Long term | New business ventures with capital crunch | 15% to 22% | 1 to 10 years. | Processing fees – 2% to 6.5% of the loan amount. | The owner’s personal credit profile is considered for a Start-up loan as the business is new. |
| Working Capital loan | Unsecured Short term | Daily business needs like the purchase of raw materials, paying the labour, creditors, foreign trade | 15% to 24% | 12 months | 1% to 3% of the loan as processing fees. | |
| Loan Against Property for SME | Secured Long term | Loan amount exceeding Rs 50 lakhs for capital-intensive businesses. | 8% to 25% | 10 to 20 years | 1% to 4% of the loan as processing fees. | Residential or commercial property pledged as collateral. 70% of the property value is given as a loan. |
| Invoice Financing | Secured Short term | Small businesses factor their invoice receivable in turn for funds. | There is no interest rate on invoice financing. The lenders retain 1% to 5% of the invoice amount as fees. | Less than 12 months. | Factoring charges from 1% to 5%. | 70% to 80% of the invoice is provided as a loan. Repaid when the invoice is received. |
| Equipment Financing | Secured Long term | Manufacturing businesses purchase costly machinery and equipment through equipment financing. Funding is available for manufacturing, office, construction, aviation, medical, and electronic equipment. | 8.5% to 18% | 1 to 5 years | 1% to 3% of the loan as processing fees. | Machinery and equipment are pledged as collateral. |
| Business Loan For Women | Unsecured or Secured Short term or Long term | To encourage women entrepreneurs by providing low-interest rates and faster loan processing. | 7.5% to 9% | 1 to 5 years | Government incentives are also available for business loans for women. | |
| Overdraft | Secured Short term | Used for working capital and short-term capital needs.The loan is provided as a withdrawal limit. | 10.75% to 22% | Less than 12 months | Processing fees of 1% to 3% of the overdraft.Non-utilisation charges of 1% to 2% of the unutilised amount. | Provided against Fixed Deposit. |
| Merchant Cash Advance | Unsecured Short term | Ideal for retailers and cash-intensive businesses. Provided against daily sales. Installation of Point of Sales (PoS) devices is a must. | Works like invoice financing. Fees range from 1% to 3% | Less than 12 months | Factoring charges, Underwriting charges from 1% to 5%. | |
| Business Credit Card | Secured Short term | For daily business expenditure. | 22% to 24% | Less than 12 months | Joining fees, Annual fees start from Rs 500.Late payment fees start from Rs 200.Foreign currency translation fee from 3.5% of the transaction. | Offers, discounts, and rewards for the expenditure. |
Apart from the general fees and charges discussed in the above table, there will be document charges, annual maintenance charges, mandate rejection charges, cheque bounce charges, duplicate statement charges, and penal interest rates for business loans wherever applicable.
General Eligibility Criteria For A Business Loan
To understand more about the eligibility requirements for a business loan we recommend this read
- Age between 21 and 65 years.
- The business has been in existence for at least 2 years. For start-ups, it is 1 year.
- The business can be a sole proprietorship, partnership firm, limited liability partnership, private limited company, public limited company,
- The minimum annual turnover for businesses shall be Rs 12 lakhs and for professionals a minimum of Rs 3.5 lakhs
- A credit score of 650 and above.
Documentation Required For A Business Loan
| Identity proof (for the owner/partner/director) | Aadhar card, Passport, Driving licence, Voter ID |
| Address proof | Ration card, Passport, Latest utility bills |
| Proof of the existence of business | Rental agreement, Constitution certificate, Registration under any Act (For eg PF, Labour law, Professional Tax)Business-specific licences like FSSAI for exampleBank statements |
| Income proof | Bank statements for the last 6 monthsIncome Tax return of the business and the owner for the last 2 or 3 yearsAudited financial statements of the last 2 or 3 yearsProjected financial statements for 5 years |
Features Of A Business Loan
- Instant funding without collaterals.
- Documentation is minimal.
- Attractive interest rates.
- Flexible repayment tenure.
- Additional or higher loan sanction for maintaining good credit history and relationship with the lender.
- Customised loan offerings based on the needs of the business.
- Business partner for growth.
Business loans are an inevitable part of the funding journey of any business. Business loans are tailored to meet the unique demands of a business. It is very important to analyze and compare the various business loan products in terms of interest rates, charges, and repayment flexibility.
The business loans must be repaid regularly to qualify for continued funding at the best interest rates and have a good relationship with the lender.