How To Decide Which Type Of Business Loan Is Right For You?

Due to the pandemic, many offices were shut down, and others relied on a work from home strategy. But as the entire international economy is on the verge of collapsing, such a situation led to insufficient fund flow in the organization, affecting the businesses' growth and stability. Many startups are already on the verge of loss and may sink if this turbulence of financial issues remains the same in the market. To revive or maintain an appropriate fund flow in the company, people may opt for a Business Loan. But there may be a chance that you are confused about which type of business loan is right for you. You can get the answer to all such questions with us.

● Loan From Individuals

It is the most well-known way to get a loan informally. All you have to do is ask your friends or family member to provide some funds for business. You need to promise to return them in a specified period. In some cases, your friend may recommend you to visit a nearby money lender. The problem is that you need to have a substantial social circle. Moreover, sometimes asking for money from friends and relatives may affect your interpersonal relationships with them.

o Benefits

The prime benefit is minimum documentation. As the lender is a known person, he may not ask for a bunch of documents. Also, the interest r¬ate may be lesser when compared to formal financial institutions. You may all get some extra help from ones who care about you and help you.

o How To Apply

There is no sequential process in the application. All you have to do is share your problem with your dear ones. You may need to write a promissory note that states the tenure well as the amount. If you're looking for a loan for a small business, then this option can be an excellent option for you.

● Term Loan

As the name depicts, this loan has a fixed tenure ranging from 1-10 years and can be helpful to fulfill various fund requirements like asset acquirement, business expansion, etc. With term loans, one can get a lump sum amount as capital in their business which can be used for several purposes.

o Benefit

The prime benefit is introducing considerable capital in the business, which frees up the cash flow for meeting the other expenses. As cash flow is a liquid source and can be utilized to settle any liability, it is better to save it and invest only when required. It also conserves the shareholder’s equity, and the approval process is also quick.

o How to apply

You need to contact a bank/NBFC and share ITR for at least the past two years. The business should in a functional state for the past 2-3 years with audit reports from a CA to get a loan for business through this option.

● Startup Loan

If your business has recently started, then you can opt for a startup loan. Such types of loans are planned for a startup that has an excellent credit history. Your application will be proceeded as per the points, and you can choose any tenure from 5-7 years. There are two types of startup loans:

Business credit card/ line of credit: similar to a credit card for the organization and not for individuals

Equipment financing: Equipment that you intend to buy is considered as collateral to take this loan.

o Benefits

The rate of interest (ROI) of this business loan is lesser when compared with other formal loans. There is no mandate to pay the interest of the loan taken in the first 9-15 months of tenure in the line of credit, which is a great sigh of relief for a startup. With equipment financing, the ROI decreases, and the depreciation applied on the equipment is helpful to get some tax benefits.

o How to apply

There are many government schemes through which you can apply for this loan. These are Bank Credit Facilitation Scheme, Pradhan Mantri Mudra Yojana (PMMY), Credit Guarantee Scheme (CGS), Standup India, and Sustainable Finance Scheme. Many banks also offer such options, but their ROI will be at a higher end. The documentation and procedure are different for every start-up loan. For instance, if you are applying for equipment financing, you need to submit a vendor quote, credit report, and statement stating the utilization of the equipment.

● Invoice Financing

It is a loan for small businesses, but big companies can also opt for this option. In this type, the business owner can get a loan against the bills receivable, which have been generated but not yet received. Around 70% of the invoice amount can be raised to manage expenses until the debtor receives payment.

o Benefits

It does not require any security and help in improving the cash flow to meet up urgent expenses.

You can repay the amount whenever you get the payment from the client against present invoices, so no pressure on EMIs.

o How to apply

The application process is easy and requires a summary of bill receivables with an original copy.

● Working Capital Loan

Working capital used to meet up daily expenses, and a large part of it comes from a cash or bank deposits. If you are struggling to meet such expenses, you can get a loan for business through Working Capital Loan. It is a valid option for service providers, wholesalers, manufacturers, retailers, or traders engaged in exports and imports. Non-profit organizations are not eligible to apply for such loans.

o Benefits

It can help maintain appropriate levels of payment of overheads, accounts payables, purchase of short-term inventory and raw materials, wages, and other short-term financial requirements. It can help in paying off short term loans with easy repayment options.

o How to apply

You need to get in touch with any registered institution that provides financial services in this stream. You may need to have an excellent turnover in the past few months and many aspects like the office location will be considered. So prepare the required documents accordingly.

● Business Loan For Women

For women empowerment, there are many schemes like Cent Kalyani, Shree Shakti Package, Srinagar and Annapurna, Synd Mahila Shakti, etc. These types of loans can be opted for by startups as well as well-settled organizations.

o Benefits

The ROI is comparatively lower, and the repayment option is also flexible. The processing is also fast.

o How to apply

Before submitting, you should have your business plan ready and the document like ITR for the past year, proof for a business address, etc.

● Loan Against Property For SME

It is one of the most chosen options among all types of loans as it can help get a high lump sum amount by keeping the property as collateral. The processing time is faster, and you can get around 70% of the property's current value. Remember that your property should not be associated with any kind of dispute.

o Benefits

Get faster dispersal with lower ROI and repay the loan in a longer duration so that you can feel free from this liability by repaying it in small amounts. It can even help in managing huge expenses, which may not be possible with other loan options.

o How to apply

The procedure is simple for this business loan. All you need is the documents of the property and some documents associated with your business like registration certificate, past ITR, etc.

● Overdraft Facility

If you are looking for urgent cash for business operations, you can opt for an overdraft. It is offered only after evaluating the credit history, cash flow, and repayment history. It helps to meet urgent minor expenses.

o Benefit

You only need to pay for the borrowed amount from the overdraft limit, and this feature makes it a flexible loan option.

o How to apply

It is better to contact your bank in which you have your current account for overdraft which is a feasible loan for small businesses.

● Merchant Cash Advance

If you are a trader, you can get enough cash flow with this option as an advance of the capital. The amount of this advance depends on daily credits. Herein the flow of payments should be fine; otherwise, fewer amounts will be offered.

o Benefits

You need to pay according to daily sales and increase the advance amount when the business flourishes well. So in the peak season of your business, you can choose this option to get a high volume of goods and earn better profits.

o How to apply

You need to provide some documents like GST return of past six months, statement of the current account, statutory documents of a business, and identity documents of the merchant. If you have these documents, then visit your bank to apply for a merchant cash advance.

So these were the most popular business loans that can help businesses to get them some funds. We hope that you have got the answer to ‘Which Type of business loan is right for you?’

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