Capital investment is necessary for the growth of any business. One way to overcome capital constraints is by availing of business loans. Small and medium enterprises (SMEs) in India have several options while looking for a business loan.
4 Kinds of Business Loans
Here are four types of business loans that are available for SMEs in the country.
#1 Working capital finance
Working capital loans are useful to meet regular business expenses and ensure smooth functioning of the business operations. These loans may be secured or unsecured.
- Secured working capital loans
This type of capital finance is available by mortgaging some assets. These may include equipment, machinery or receivables. Based on the value of mortgaged property, the lenders determine the amount that may be financed. Business owners may also mortgage their homes or investments to raise funds.
- Unsecured working capital loans
Such loans are available without any security. However, the unsecured business loan interest rate is higher because the lenders face greater risks.
#2 Term loans
These are often available for funding long-term capital requirements, such as buying land or fixed assets. The interest rate may either be fixed or floating. Borrowers must repay the term loan with a fixed installment payable either monthly or quarterly.
Entrepreneurs must pay a certain pre-determined margin towards the total cost of their planned purchase. Availing of term loans for a longer duration is advisable to reduce the regular repayment installment.
#3 Loan against property (LAP)
This type of loan for a business is available by mortgaging commercial or residential property or vacant land. The money raised may be used for any purpose, such as buying assets, meeting working capital requirements, expanding the business, marketing, and advertising, or any other business-related expense. Most financial institutions like Capital First offer LAP at competitive interest rates for SMEs.
#4 Cash credit facility
Such a service is available in the form of an overdraft against the inventory of raw materials or finished products. Alternatively, such type of SME financing may also be availed of by securitizing current assets like accounts receivable. The cash credit limit is determined by deducting a certain margin from the book value of the current assets.
Entrepreneurs may avail of SME loan without any difficulties. The entire process is quick and hassle-free and may be completed within a few days. Furthermore, the repayment schedule is calculated based on the chosen tenure to ensure borrowers do not face financial difficulties.
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