As you all know it is not easy to make a mark in the world of business as there will be new challenges propping up every day. One such challenge which every entrepreneur faces especially at the beginning of the business is raising adequate capital. This is where you will find the need of a business loan. Now a business loan does sound like a personal loan but it is specifically designed for businesses. These loans are here to provide you the financial assistance that every businessman needs to grow their business.
Types of Business Loans:
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Term loan: The first and the most popular type of business loan is the term loan. This term loan is primarily used to acquire long term assets such as machinery, land, building, etc. These loans have a fixed term of payment which is the reason they are called term loan. Now the interest charged by the lender on these loans can be either floating or fixed, something which needs to be decide before receiving the loan. For most term loans, the repayment mode is either quarterly or monthly so choose yours very carefully. Term loans are usually given for a period of 2 to 10 years but if you need a longer tenure then it would be a good idea to get it sanctioned for an extended period beforehand.
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Loan against Property: A very commonly used business loan is the one which is taken by keeping the properties of the borrower as security. These types of business loans are usually sanction or provided by banks. Here the property is basically used as collateral against the amount of loan taken. These loans are normally deemed as long term loans because they are used for buying of land and other long term assets. But the catch is that they are more often than not used for paying off day to day expenses of the business including paying of salary to the staff, expansion of the existing business, etc. therefore, unlike term loans, there aren’t any particular rules as far as application of the loan is concerned, which provides the entrepreneur with a degree of flexibility. This loan is usually taken for a period not exceeding 15 years but no less than 3 years. The tenure of such loans depends on the track record and background of the borrower.
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Cash Credit facility: Cash credit facility is another type of business loan, which is provided to borrowers in ways of overdrafts. This overdraft is usually given against the current assets of the business including raw materials, stock in trade, etc. If you want to use cash credit facility for your business, then it would be wise to use the funds for financing the working capital of the company. The tenure of these loans is 12 months or 1 year, which can be renewed on expiration of said period.
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Line of credit: Line of credit is a form of loan, which allows the borrower to receive small amounts of loan over time rather than getting a lump sum amount at once. These types of loans are deemed perfect for small businesses, which need the flow of regular funding to grow. One thing that you need to know that the Line of Credit facility is like using credit cards, so the interest can be a bit higher than usual, therefore deliberate well before opting for this facility.
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Short term loans: These loans are just what small entrepreneurs look for. Here, the loans are taken for small period of time at relatively lower interest rate. The maximum period of short term loans is 12 months. The funds arising from these loans are generally used to replenish the business against the day to day expenditure which includes working capital financing.