Business Loan:

Types of Business Loans in India:

It is a common misunderstanding that only banks and other government institutions are permitted to sanction a business loan. There are several options one can opt to fund their business. With an array of loan options available in India, understanding the various types of financing will help in making the correct financial decision. Mentioned below are some types of business financing.

• Credit line / Overdraft – This is a type of loan wherein a businessman can withdraw funds up to an authorised limit from their company’s bank account even if the virtual amount is nil. The additional amount is considered a loan that can be repaid along with interest.
• Invoice Discounting – Also known as “Loan on Accounts Receivables” or bill discounting is a type of short-term business financing that uses unpaid business invoices as leverage. Generally, a certain percentage of an invoice is provided to the business by the finance company for a small fee.
• Trade Creditor – A vendor that has delivered goods or provided services to your business that hasn’t been paid yet is known as a trade creditor. This is a norm practiced across industries and can be considered as a business loan.
• Short-term Loan – Short term business financing has a short tenure, generally between 3–18 months. These loans are typically used for urgent business requirements such as funding purchase orders, working capital, staff salary, etc.
• Equipment Finance – This is a type of business loan used to finance buying or upgrading machinery. These loans are relatively easier to obtain as the machinery itself acts as collateral to lenders
• Equity Funding – Raising funds via equity is another way for business owners to acquire funding. However, selling off shares dilutes the owner’s share in the company. Although preferred in more advanced markets, this option may not be a favoured option in India.
• Advances / Factoring – Similar to invoice discounting, the business owner is paid against an unpaid invoice. However, only a percentage of the invoice is paid. The remaining amount is retained to factor in unforeseen expenditure.

Features and Benefits of Business Loan:

• Flexibility – The market offers a selection of loans that cater to various business requirements. This makes it easier for a businessman to make an apt, stress-free decision due to flexible repayment options.
• Short-term options – There are so many short-term loan options in the market today that businessmen can opt for them at relatively low-interest rates. This, in turn, can help a company perpetuate growth.
• No hidden costs – Transparency is something banks and other financial institutions live by in the modern financial era. Consequently, loans generally have no hidden costs.
• Competitive rates of interest – SMEs and even startups enjoy the benefit of the marketplace offering them an array of business financing options. Being a competitive marketplace compels competitive interest rates.
• Streamlines cash-flow – Business financing provides businessmen with the opportunity to streamline cash-flow and thereby help eliminate any hiccups that can jeopardise profitability.

Difference Between Invoice Discounting and Business Loan:

Although they are both technically loans, there are some key differences between the two as illustrated below. Here’s a quick look at invoice discounting vs business loan.

• A business loan takes longer for processing while invoice discounting is generally processed in a few days.
• Traditional business loan involves a lengthy process of documentation and paperwork, whereas invoice discounting is an online process that involves little to no documentation.
• To procure a business loan in India, a company must be operational and profitable for at least 2 years. To procure invoice discounting, the business only needs to be 10 months old.
• Business financing typically requires some sort of collateral while the invoice itself serves as collateral in case of invoice financing.
• Business financing appears in the balance sheet as debt while funding secured through invoice discounting doesn’t interfere with the balance sheet.
• Late payments and defaults made on traditional business financing affect your credit score, but in case of invoice discounting, the credit agencies are notified only in case of defaults at the end of the tenure of the invoice.

Eligibility Criteria For a Business Loan Via Invoice Discounting:

• The business must be operational for a minimum of 10 months.
• The company must be a blue-chip company catering to at least two large corporations.
• The business must have a credit score of over 650
• The company must have a minimum turnover of at least Rs.25 lakh

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