9 Types of Business Loans in India
To run and grow a business in India, getting funds regularly is often necessary. Whether it’s a small shop or a big company, every business owner faces times when they need extra money—like for managing everyday expenses, buying costly machines, hiring new employees, or moving into new markets
This is where business loans in India come in handy. Right now, banks, non-banking financial companies, and even online finance companies have many loan options designed for different business needs. With so many choices, it can be tough to figure out which one to pick. Should you opt for a long loan term? Or would a working capital loan suit you better? Is getting cash against invoices a good idea, or should you look into a line of credit?
To help you decide, we’ve made this guide that explains the 9 key types of business loans in India. For each loan type, we will clarify what it means, who the best fit is, and lay out the benefits and drawbacks so you can see if it’s right for your business.
In the end, we’ll also talk about how Money Buddha, a reliable financial advice site, assists you in comparing, applying for, and getting the right loan easily.
1. Term Loans (Short-term and Long-term)
A term loan is a typical means of borrowing money. Business owners borrow a lump sum and repay it through monthly installments. Businesses use short-term loans (up to 1.5 years) for urgent needs like buying supplies or paying staff. At the same time, long-term loans, which take from three to ten years or longer, are best for large projects, such as purchasing property or constructing new plants. Ideal for:
Best for:
- Expanding business or entering new markets
- Buying office buildings, factories, or heavy machinery
- Businesses that have stable incomes and can pay back the loan
Pros:
- Easy repayment plan: With a fixed monthly expense, you can budget more easily.
- Greater amounts available: You borrow heavily, which is useful for expansion.
- Flexible repayment terms: You select plans with your cash flow in mind.
- Secured and unsecured loan options: Collateral-backed loans tend to have lower interest rates, while unsecured loans can be obtained quickly.
- Enhances credit rating: Timely payments can enhance your company’s credit score.
- Tax advantages: Interest payments can usually be excluded from taxes.
- Enhances credit relations with lenders: Favourable repayment history instils confidence in future loans.
Cons:
- Strict payment schedules: You have to pay even when you’re struggling.
- Slow processing: The requirement for lots of paper and checks can put off immediate financial assistance.
- High standards are needed: You typically need healthy finances and a solid credit rating.
- Early repayment fees: There are lenders who charge fees when you repay your loan early.
- Risk of forfeiting collateral: If you fail to make payments, you risk losing your assets.
- Not suitable for emergencies: This loan is more suited for planned expansion and not for unexpected issues.
2. Working Capital Loans
A working capital loan provides immediate cash for operating expenses such as salaries, raw materials, rentals, or supplier payments. It aids firms in performing smoothly, particularly those that experience seasonal demand or have clients who delay their payments.
Best for:
- Retailers, traders, or firms impacted by seasons
- Small and medium-sized enterprises with slow client payments
- Firms requiring short-term money to continue operations
Pros:
- Fast access to funds: Getting the green light and accessing cash is typically quick.
- Keeps the business going: Ensures employees and vendors get paid on time.
- Seasonal padding: Helps during off-peak periods or peak times around holidays.
- Small, manageable sums: Businesses only borrow what they need.
- Improves vendor relationships: Timely payment fosters confidence.
- Avoids working capital shortages from slowing growth: Prevents cash deficiencies from hindering progress.
Cons:
- Higher rates of interest: This is particularly so for unsecured loans.
- Smaller loan sizes: Many times, these sizes fail to finance large projects.
- Shorter tenors: The repayment tenors are short and stringent.
- Security may be required: For bigger loans, the lender may require something of value as security.
- Promotes reliance: Companies may continue borrowing rather than curing cash-flow issues.
- Repeated borrowing impacts long-term credit record: Repeated borrowing damages the overall credit rating.
3. Equipment & Machinery Loans
These loans are intended to help buy machines or equipment, allowing businesses to stay up-to-date with technology. Lenders often use the purchased equipment as collateral, which makes approval easier.
Best for:
- Manufacturers updating their machines
- Hospitals acquiring medical tools
- Logistics companies are buying vehicles
- Construction firms investing in heavy equipment
Pros:
- Dedicated financing: The loan is specifically for buying equipment.
- Easy approval: The equipment serves as collateral for getting the loan.
- Boosts productivity: New machines improve work efficiency.
- Tax benefits: Interest and depreciation could lower tax payments.
- Preserves working capital: Businesses do not have to dip into cash reserves.
- EMIs spread high costs: Expensive machines can be paid off over time.
Cons:
- Restricted use: These loans are only for machinery purchases, not other expenses.
- Obsolescence risk: Machines can become outdated quickly.
- Down payments required: Lenders usually do not cover the entire cost.
- Resale value issues: Equipment may lose value faster than it can be paid off.
- Default risks: If a business slows down, it might lose the equipment.
- Maintenance costs: Even financed machines need regular upkeep expenses.
4. Business Line of Credit
This is a type of credit where lenders set a limit, and businesses can withdraw money as needed. Lenders charge interest only on the amount businesses use. It is very flexible and can be used multiple times.
Best for:
- Small to medium businesses with changing costs
- Companies needing quick access to funds without applying again
Pros:
- Pay-as-you-use model: You only pay interest on what you take out.
- Reusable facility: Once paid back, you can use the limit again.
- Highly flexible: Can be used for payroll, stock, or emergencies.
- Builds credit history: Regular repayments improve creditworthiness.
- Convenient access: Usually linked directly to a business bank account.
- Great for seasonal fluctuations.
Cons:
- Strict eligibility: You need a strong financial background to qualify.
- Overuse risks: Easy access might lead to irresponsible financial habits.
- Annual/renewal charges: Some banks may charge fees.
- Variable rates: Interest rates can rise suddenly.
- Collateral may be required for high limits.
- Not ideal for large expansions: Better for regular expenses
5. Invoice Financing / Bill Discounting
This is a loan based on unpaid invoices, helping businesses get cash quickly by turning receivables into money. Lenders provide most of the invoice amount upfront and later collect from the customers.
Best for:
- Exporters and wholesalers, or any B2B companies, with long waiting times for payment
- Businesses needing cash flow without adding new debt
Pros:
- Immediate cash flow: Quickly convert invoices into working money.
- No extra collateral needed: Invoices are used as security.
- Enables growth: Helps to take larger orders without cash worries.
- Protects vendor/employee relations: Ensures fast payments to others.
- Quick processing compared to traditional loans.
- Less debt-heavy: This method gets money based on what you are owed, not by creating more debt.
Cons:
- High service fees: Lenders take away a big chunk of your money.
- Profit margin shrinkage: Expenses cut into your total earnings.
- Relies on client creditworthiness: If your clients are late with payments or don’t pay at all, you face problems.
- Not scalable for all businesses: This mainly helps businesses that deal with many invoices.
- Short-term fix: It doesn’t address the need for money in the long run.
- Reputation risks: Some clients might not like having a third party involved in how they pay.
6. Business Credit Cards
These are cards for small businesses and new companies to pay for smaller, regular costs. They help keep track of spending, help build a credit history, and usually offer benefits like cash back and discounts.
Best for:
- New businesses manage everyday expenses.
- Small businesses that want to improve their credit history.
- Companies that often travel or make frequent purchases.
Pros:
- Instant short-term financing: No long applications are needed.
- Improves credit profile: Using it responsibly makes your credit score better.
- Reward programs: You can earn cash back, discounts, and travel points, which save you money.
- Expense tracking: It helps track what employees and different departments spend.
- Flexible repayment windows: You have 45 to 55 days to pay back.
- Accessible to startups lacking collateral: New businesses without assets can still get these.
Cons:
- High interest if unpaid: The rate can rise to 36 to 40% each year.
- Limited credit limit: The amount you can borrow is smaller compared to loans.
- Overspending temptation: It’s easy to swipe and spend too much, which can hurt your finances.
- Late fees and penalties: If you miss payments, you’ll face steep charges.
- Not suitable for large investments: These cards aren’t meant for big purchases.
- Frequent use without repayment hurts credit history: If you use the card often without paying it off, your credit score can suffer.
7. Overdraft Facility
This is a service that lets businesses take out more money than they currently have in their checking account, but only up to a certain amount agreed upon in advance.
Best for:
- Companies that have unexpected short-term costs
- Businesses that need quick money for emergencies
Pros:
- Quick access: Money is available immediately when needed.
- Interest only on what you use: There’s no cost for the parts you don’t use.
- No fixed payments: You can pay it back when your business gets back on track.
- Revolving credit: After you pay it off, you can use it again.
- Acts as a backup in emergencies.
- Builds a good relationship with banks.
Cons:
- Needs good banking history: Not everyone can get it.
- Risk of overusing: Easy access might lead to money problems.
- High rates if you go over your limit.
- Limit can change: Banks are allowed to lower or cancel your limit at any time.
- May require collateral, especially for larger amounts.
- Not the best option for long-term needs.
8. Startup Loans / MSME Loans
These loans are made to help new businesses and MSMEs. They are often supported by government programs like MUDRA, Stand-Up India, or SIDBI.
Best for:
- New business owners starting their ventures
- MSMEs looking for money to grow
- First-time borrowers who need government help
Pros:
- Easier access for new business owners.
- Lower interest rates: Thanks to the help from the government.
- Encourages creativity: Supports more new businesses.
- Helps create a financial history.
- Flexible repayment options.
- Programs specifically for women and disadvantaged groups.
Cons:
- imited loan amounts: Might not be enough for bigger projects.
- Lots of paperwork: Needs thorough project plans, reports, etc.
- Eligibility rules: Not every business can qualify.
- Slow processing times: Government approvals can take a while.
- Not as scalable as private loans.
- Some programs require regular updates and monitoring.
9. Secured vs. Unsecured Business Loans
Loans are mainly classified into secured loans (which need collateral) and unsecured loans (which don’t require collateral). Each type has advantages and disadvantages based on how strong the business is.
Best for:
- Secured: Established companies that have valuable assets
- Unsecured: Small businesses with good credit needing quick cash
Pros:
- Secured loans: Generally have lower interest rates, larger amounts, and longer repayment periods.
- Unsecured loans: Quicker approval and no risk to your assets.
- Many lenders Can be found through banks, non-banking financial companies, and fintech companies.
- Custom options: There are options for all sizes of businesses.
- Flexible spending: Money can be used for various needs in the business.
- Helps improve credit: Paying regularly can raise credit scores.
Cons:
- Secured loans: Risk of losing your assets and a longer approval process.
- Unsecured loans: Higher interest rates, smaller amounts, and shorter repayment terms.
- Stricter requirements for unsecured loans.
- Risk of relying too much on loans: Businesses might keep refinancing.
- Penalties for foreclosure.
- Unsecured loans can hurt your credit faster if not managed well.
How Money Buddha Helps You Find the Right Loan
There are so many business loans in India that picking the best one can be tough. That’s why Money Buddha is here to assist you.
- It checks out your business details, how much money you earn, and how much money you need.
- It looks at different lenders to search for the best interest rates available.
- It suggests the most suitable type of loan for your business.
- It helps with the fully digital application process and makes approval happen faster.
- It saves you time and helps avoid expensive mistakes when choosing a loan.
Whether you’re launching a new business, operating a small to medium business, or running a well-established company, Money Buddha ensures you get the right funding when you need it.
Conclusion
In India, business loans are not one-size-fits-all anymore. Based on their development and the nature of the business they do, entrepreneurs have the option today to opt for any number of different options, like term loans, working capital loans, invoice financing, and MSME loans. You can operate your business effectively, develop it in a secure way, and preserve your market advantage in an evolving market by availing the correct loan.
It’s important to understand your particular company’s financial requirements and choose a loan that will enable future expansion. By closely considering the benefits and detriments of each type of loan, you can make intelligent decisions that will move your company forward instead of holding it back.
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