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Different Types of Small Business Loans

20 Apr

Different Types of Small Business Loans

If you are a small business owner that must understand how difficult it is to manage various tasks to keep the business running smoothly. Most of the times you are multi-tasking and are handling multiple tasks at once. But in such situations, you might not be able to devote full attention towards the financial condition of your company. Suddenly you realise that you need to purchase new machinery or renovate your factory or are facing working capital crunch. Your emergency reserve might not suffice, and you would not want to put all your personal saving in it. What can you do in such a situation?

Your best option is to avail a small business loan. Financial Institutions such as Banks and NBFC’s extend different types of small business loans according to your requirements. As there are many types of loans available, you need to understand their features to be able to take a sound decision.

Following are the most popular types of small business loans available in India: –

  • Unsecured Business Loans: – As the name suggests, these business loans do not require any collateral and are unsecured. Unsecured business loans are provided by almost all types of financial institutions and can be used for any purpose that you deem fit ranging from the renovation of building to payment to suppliers. But as these loans are unsecured, lenders want you to have a good credit score and a decent credit history otherwise the application might be rejected.

 

  • Term Loans: –Term loans are offered by the financial institution for the purpose of purchasing a capital asset such as machinery, land or equipment. These loans are secured in the sense that the acquired asset needs to be hypothecated with the lender. It is very useful for you as you need not take out a huge chunk of cash out of your working capital, you can easily purchase the capital asset with the loan and repay in EMI’s.

 

  • Working Capital Limits: – Working capital limits are offered by banks against your current account to help you meet the shortfall in your cash cycle. Sometimes you must sell the goods on credit, but you still need to pay the expenses and make payment to suppliers in the meanwhile. Working capital limits help you overcome seasonal variations and ensure that you can meet your liabilities on time. You only need to pay the interest on a monthly basis and can pay the principal according to your financial situation. Interest is calculated on a daily basis on the amount outstanding.

 

  • Loan against property/Top-up Loan: – It is a secured loan where you need to mortgage your property with the lender to avail the loan. The amount thus obtained can be used by you for any purpose as there is no restriction on the usage of funds. Similarly, if you have a Property Loan with a financial institution and the value of the property is more than the loan amount due, you can avail a Top-up Loan for your requirements.

 

  • Bank Overdraft: – It is a temporary facility which allows you to withdraw more amount from your account than the available balance. This facility is useful when there is a cheque presented to your account, and the balance is insufficient. Your banker would pass the cheque by extending the overdraft facility. The amount lent to you is adjusted as soon as there is sufficient balance in the account. Interest is charged on a daily basis on the amount due.

 

There are numerous types of loans available for you to meet your finance requirements. You just need to select the appropriate loan after analysing your needs and repayment capacity.

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