Types of Business Lending
The business lending solutions provided by banks and NBFCs help entrepreneurs to build businesses without giving up ownership and management. The business lending solutions can be categorized based on a number of parameters. For instance, the secured business lending solutions require borrower to pledge their business or personal assets as collateral, whereas the unsecured business loans enable entrepreneurs to avail collateral-free credit.
Some business lending solutions require entrepreneurs to incur debt, whereas others enable borrowers to avail funds by converting current assets into liquid assets. The business lending solutions further differ from each other in a number of categories – rate of interest, repayment tenure, and terms of lending. That is why; it becomes essential for entrepreneurs to understand and compare different types of business lending.
7 Types of Business Lending Entrepreneurs Need to Know
Many entrepreneurs opt for term loan to meet working capital needs or improve cash flow position in the short run. Both bank and NBFCs provide term loans with varying tenures and terms of lending. But the NBFCs, unlike commercial and nationalized banks, disburse term loans in a short amount of time. The term loans still differ from each other in the categories of tenure, interest rate, and eligibility criteria. Some lending institutions even require borrowers to use their personal or business asset as collateral to avail term loans.
Working Capital Loans
As its name indicates, the business lending solution helps entrepreneur to fund their working capital needs. The borrower can use working capital needs for a number of purposes – buying inventory, recruiting skilled employees and modernizing business processes. The entrepreneurs can avail working capital loans from both banks and NBFCs. They can further opt for business lending option meet working capital needs without paying high interest rates. But the lenders provide working capital loans to borrowers to excellent personal credit score and businesses with clean credit history.
Business Line of Credit
The revolving business lending product helps entrepreneurs to avail funds up to a preapproved credit limit. Also, the borrowers are required to pay interest only on the funds withdrawn by them. Many entrepreneurs prefer business line of credit to other business lending solutions to avail and repay credit in a flexible way. They even utilize the business line of credit to meet urgent financial needs or unexpected expenses. But the lending institutions normally extend business line of credit to established businesses with excellent credit score and strong credit history.
The specific-purpose business lending options help business owners to avail credit to buy inventory or equipment. An entrepreneur can opt for equipment financing to purchase the equipment required to modernize and improve his business operations. Likewise, inventory loans help entrepreneurs to buy inventory in bulk before the busy season starts. But the borrower has to use the inventory or equipment as collateral to avail the credit. The amount, tenure, and rate of interest also differ according to the type of equipment.
Unlike other business lending solution, invoice discounting helps entrepreneurs to avail funds by converting their current assets into liquid assets. The invoice discounting services provided by various lending institutions enable business owners to fund working capital needs by avail credit against unpaid invoices or goods received notes. The borrowers can avail credit about 80% of the unpaid invoices before their due date. However, the rate of discount differs from one lender to another.
POS Based Business Loans
The technology-driven business lending solution enables entrepreneurs to avail credit based on the monthly sale routed through POS machines. The business owners can further avail additional credit by encouraging customers to make payment using their debit or credit cards. There are a number of NBFCs that provide POS business loans with multiple repayment options – fixed daily deductions and percentage of daily sales. Hence, the entrepreneurs can choose the right repayment option to repay the POS-based loans without impacting their cash flow position.
Pradhan Mantri Mudra Yojana (PMMY) – a scheme launched by the Government of India – aims to make credit available to small and medium enterprises (SMEs) in non-firm sectors. The small business owners can avail business credit under three distinct schemes Shishu, Kishore and Tarun. They can avail credit from Rs 5 lakhs to Rs 10 lakhs under the Tarun scheme, and use the loan to meet working capital needs and expand business operation. The entrepreneurs can further apply for Mudra loan through various lending institutions.
On the whole, the entrepreneurs have option to choose from different types of business lending. But they must compare the business lending solutions based on eligibility criteria, application process, and terms of lending. The initial research will help business owners to avail credit on time without paying higher rate of interest.
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