Types of Business Loans in India

In India, various types of business loans are available to cater to different needs and stages of businesses.

Here are some common types of business loans offered:

• Term Loans
• Working Capital Loans
• Business Expansion Loans
• Equipment Financing Loans
• Invoice Financing & Bill Discounting
• Machinery Loans
• Professional Loans
• Personal Loans for Business
• Government-Sponsored Loans(CGTMSE/MSME)
• Merchant Cash Advance
• Line of Credit/OD
• Secured Business Loans
• Unsecured Business Loans

Term Loan:

A term loan is a type of loan where you receive a specific amount of money upfront and then pay it back over a set period, usually with fixed monthly payments. It's often used for things like buying equipment or expanding a business or can be taken on an individual basis as well. The interest rate can be fixed or variable, and the loan term can vary.

Working Capital Loan:

A working capital loan is a loan that is taken by a company to support the daily operations of their business. Clients across small and medium enterprises can benefit from a working capital loan to finance short-term needs. Based on the types of business, the requirements for operating expenditure vary. According to the unique requirements, banks offer a tailored working capital amount. Several Small and Medium Enterprises (SMEs) use working capital loans to bridge their financial gaps like the repayment of debt. Especially for seasonal businesses, a working capital loan can help companies meet their daily operational costs. Working capital loans are only offered to SMEs and Micro Enterprises to fund their daily operations.

Bill/Invoice Discounting:

Bill or invoice discounting is a financial practice that involves the selling of a business's unpaid invoices or bills to a third party (typically a financial institution or a factoring company) at a discounted rate. This allows the business to receive a portion of the invoice amount upfront, rather than waiting for the customer to make the full payment at a later date.

Letter of Credit (LC):

A Letter of Credit (LC) is a document issued by a bank that guarantees a buyer's payment to a seller in a trade transaction. It ensures that the seller will be paid once they meet the agreed conditions, usually involving shipping documents. LCs are commonly used in international trade to minimize risks for both parties. The buyer's bank guarantees payment, and the seller's bank confirms the terms are met before releasing funds.

Point-of-Sale (POS) Loan / Merchant Cash Advance

Point-of-Sale (POS) Loan:

• Financing offered to customers at the time of purchase.
• Customers can pay for products over time.
• Business partners with a lender to provide this option.
• Can increase sales and customer flexibility.

Merchant Cash Advance (MCA):

• Lump sum payment to a business.
• Repaid from a portion of daily credit card sales.
• Quick approval but may have higher costs.
• Useful for quick funding but consider fees.

Overdraft (OD):

An "overdraft business loan" is a type of credit facility offered to businesses by banks or financial institutions. It allows a business to access extra funds beyond their account balance, up to a pre-approved credit limit. This can help businesses manage temporary cash flow gaps and cover unexpected expenses.

Key points about an overdraft business loan:

• Flexible Access: Businesses can withdraw funds up to the approved credit limit whenever needed, providing flexibility in managing day-to-day operations.
• Short-Term Solution: It's designed to address short-term financial needs, such as covering payroll, purchasing inventory, or managing seasonal fluctuations.
• Interest and Fees: Businesses pay interest on the amount borrowed and may also incur fees, which can vary based on the terms and the bank.
• Credit Limit: The bank sets a maximum amount that the business can overdraw. This limit is determined based on the business's creditworthiness and financial history.
• Repayment: The business is expected to repay the borrowed amount when their cash flow improves. Interest is typically calculated only on the outstanding balance
• Qualification: Businesses need to meet certain eligibility criteria and provide financial documentation to apply for and secure an overdraft business loan.
• Convenience: It provides a convenient buffer to manage temporary financial challenges without requiring a formal application process each time funds are needed.
• Risk Management: While helpful, businesses should be cautious not to become overly reliant on overdrafts, as continuous use can lead to higher interest costs.



Overdraft business loans can be a useful tool to bridge gaps in cash flow and ensure smooth business operations. However, it's important for businesses to have a clear repayment plan and to monitor their finances to avoid excessive borrowing and associated costs.

Eligibility Criteria & Eligible Entities

Business Type:

Most lenders provide loans to various types of businesses, including sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and more.

Credit Score:

A good credit score is often required to qualify for a business loan. Lenders use your credit history to assess your ability to repay the loan.

Business Age:

Some lenders require a minimum operational history for your business, usually ranging from a few months to a year or more.

Collateral:

Secured loans might require assets as collateral to secure the loan. Collateral can be real estate, equipment, inventory, or other valuable assets.

Cash Flow:

Lenders often evaluate your business's cash flow to determine your ability to repay the loan.

Age Criteria:

Min. 21 years at the time of loan application & Max. 65 years at the time of loan maturity.

Eligible Entities:

Individuals, MSMEs, Sole Proprietorships, Partnership Firms, Public and Private Limited Companies, Limited Liability Partnerships, retailers, traders, manufacturers, and other non-farm income-generating business entities engaged only in the services, trading, and manufacturing sectors.

Business Vintage:

Min. 1 year or above

Business experience:

Min. 1 year, business location to remain same

Annual Turnover:

Shall be defined by the Bank/NBFC

Credit Score:

700 or above (Preferred by most private and public sector banks)

Nationality:

Indian citizens

Additional Criteria:

Applicants must own either a residence, office, shop, or Godown.

Eligible Entities:

Individuals, MSMEs, Sole Proprietorships, Partnership Firms, Public and Private Limited Companies, Limited Liability Partnerships, retailers, traders, manufacturers, and other non-farm income-generating business entities engaged only in the services, trading, and manufacturing sectors

Documentation for Business Loans

The list of documents to be submitted varies based on type of business entity. Submit the following documents to begin with the loan process:

• ITR for the past 2-3 years
• Current Bank Account Statement for the last 12 months
• Photocopy of PAN Card
• Address Proof for Residence such as Voter Card, Passport, Aadhar Card Telephone Bill, Electricity Bill
• Address proof for Business such as the Telephone Bill or Electricity Bill
• Last Financial Year's provisional Financials and future year's projections
• Company's business profile on the letterhead
• 2 photographs of promoters and property owners
• Sanction letter and Repayment schedule of existing loan
• GST registration certificate and GST returns of latest 2 years.
• D-Vat/Sale tax registration copy
• Udhayam Aadhar registration certificate
• Rent agreement copy of factory and residence (if property is rented)
• Business Continuity proof of 3 years (3 years old ITR/Company registration etc)
• Company PAN Card, Certificate of Incorporation, MOA, AOA, List of Directors,and Shareholding pattern for Pvt Ltd companies
• Partnership Deed, Company pan Card for Partnership Companies

Fees and Charges for Home Loan

The fees and charges of home loans usually vary from lender to lender and from case to case. The aforementioned table will give you a fair idea of the fees and charges related to home loans:

Particulars	Charges
Loan Processing Fees	0.5% to 4% of Loan Amount
Loan Cancellation	Usually 3000 to 5% of Loan Amount
Stamp Duty Charges	As per the Value of the Property and State Tax
Legal Fees	As per actuals
Penal Charges	Usually 2% per month
EMI / Cheque Bonus	Approx 499/- to 599/-

Other fees and charges that lenders may levy on your personal loan include documentation charges, verification charges, duplicate statement charges, NOC certificate charges and swap.

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