Rita and her friend Shilpa started a salon business in their neighbourhood. After a few months, they needed a lender to give them an assurance of a loan. Rita did not need a business loan right away but wanted an arrangement where she could tap into whenever there was a need to for her flourishing business. Simply put, she needed a line of credit. Lack of awareness about different commercial loans can lead you to take a quick business loan that doesn’t fit your needs. Let us understand the different small business financing options that are available to grow your business.
Most common types of business loans
Every business is different. That is why business funding needs are different too. This is how lenders, like Tata Capital, offer various commercial loans. This ensures that small businesses can choose and take the right loan product. The most common type of business loans includes term loans, short-term loans, business lines of credit, equipment financing, invoice financing, cash advances and business credit cards. Let us understand them one by one.
Term loans – A term loan is a lump sum loan that a business owner can pay back, plus interest, over a set term. While they are given for tenure as low as 1 year, term loans can also extend up to 30 years. Term loans are generally secured in nature, which means there will be a collateral serving as security for the loan.
Short-term loans – In this type of commercial loan, the loan has to be paid back with interest over a shorter term, say 3 months to 18 months in most cases. Since the money has to be repaid over a shorter tenure, the loan size is not as big as a ‘term loan’.
Machinery or equipment loan – A machinery loan allows you to purchase machinery and equipment, new as well as old, essential for smooth operations of a business. This is suitable for micro, small and medium scale manufacturing units. You can avail a maximum funding of 100% of the equipment you want to buy. Loan tenure can vary from 3 months to 60 months.
Working capital loan – This is debt that is availed to fund the working or daily operations of a business. The purpose of using the loan could be to pay regular bills, handle cash flow needs, give employee salaries, and other recurring costs. Working capital loans are best suited for businesses with a high degree of cyclicality.
Line of credit – You may not need a loan immediately but require an assurance that a loan is available when you actually need it. A line of credit gives thus helps in an efficient use of the loan. Line of credits can be given for up to 60 months. Line of credits come in very handy when you can understand there is a need for a loan in the future, but also want to be prepared for taking the loan.
Invoice financing – Many small and medium businesses get payment from clients after quite a lag. This happens especially with exporters and if the clients are geographically distant. This is where invoice financing helps you to realize up to 80 percent value of the legal invoices. The loan rates are very competitive and require no other collaterals. The tenure of invoice financing loans can be between 30 to 90 days.
Before considering taking any quick business loan, the ideal business owner should definitely understand their requirements. Instead of hurriedly taking any business funding, try to talk to reputed lenders like Tata Capital so that you can get the best small business financing opportunity. Discuss your needs clearly and get the perfect commercial loan solution to grow your business.