A sufficient amount of cash is needed by businesses in order to pay for expansion costs or cover startup costs. As a result, businesses seek out business loans to get the funding they want. A business loan is a sum of money that the company must pay back in accordance with the terms and circumstances of the loan.
It is crucial for business owners to comprehend their startup financing alternatives, how loans function, and what a lender will want to see from an owner before approaching a lender for a loan.
Business Loan Definition
The definition of a business loan is a financial instrument that can be used to cover both unexpected and anticipated expenses. A business loan is borrowed money that businesses use to cover costs they can’t afford on their own in the short term.
Loans are not provided without charge. As the cost of borrowing the money, lenders charge interest on loans. Knowing whether the interest is fixed or variable is crucial. A fixed interest rate is one that doesn’t change over the course of the loan or its payback period.
Types of Business Loans
Business finances may seem very tricky at times, especially in today’s competitive environment. As a business entrepreneur, you may wonder about the best possible option to fund your various business needs, including purchasing assets such as land, leasing a shop or factory, purchasing new machinery, working capital requirements, or basic operations expenses such as overheads and salaries.
Secured Business Loans:
Secured business loans are a popular source of capital for small firms. A personal guarantee or the pledge of assets or property as security is used to secure this sort of loan. The use of the collateral is thought to be a means by which you can reassure the lender that you will return the loan within the time frame laid forth in the loan agreement. Implicitly, it also suggests that in case you can’t repay the loan amount on time, the lender has all the rights to seize the collateral. There are two types of Secured Business Loans that are “Secured by Collateral” and “Secured by Personal Guarantee.”
Unsecured Business Loan/Collateral-free Business Loans
An Unsecured Business Loan is based purely on your business creditworthiness rather than collateral or guarantees. It determines your income, financial papers, and other relevant factors. Unsecured loans are beneficial to your business for various purposes that include business expansion, equipment purchases, inventory management, and many more.
Business loans can further be divided into five types based on the nature of the loan.
1. Working Capital Loans:
Working capital loans are taken to overcome the shortage of funds to operate a business on a day-to-day basis. It helps you in fulfilling various business expansion services like enhancing business cash flow, purchasing raw materials, addition in inventory/stock, paying salaries, hiring staff, etc.
2. Invoice Financing or Bill Discounting
Invoice Financing is also called Bill Discounting or Invoice Factoring. This kind of funding is especially for small businesses that experience a time lag between rising invoices and receiving customer payments. The lender delivers funds against the invoice amount. The lender can finance up to 70% of the invoice amount. The loan amount is vacant once the business receives the payment.
3. Equipment Finance or Machinery Loans:
Equipment finance or machinery loan is a funding option offered to purchase new equipment/machinery or upgrade/repair the existing one. If you are into large businesses or in the manufacturing sector, you may frequently use equipment financing. Businesses that borrow money for machinery or equipment also gain tax benefits. The interest rate charged by Kinara for a machinery loan is 21% to 30% p.a. The loan amount is up to Rs. 1 lakhs Rs. 30 lakhs, and the repayment tenure can range from 12 to 60 months.
4. Loans for Women Entrepreneurs
Women Entrepreneurs are majorly responsible for improved economic growth and stability in India. According to the 6th economic census by the Ministry of Statistics and Programme Implementation, women-owned businesses comprise 13.80% of the total entrepreneurs in India, which is 8.05 million out of the total 58.5 million entrepreneurs.
5. Business Credit Card
A business credit card may not be the very first option you choose to finance your business needs, but it is still helpful for short-term and immediate financial requirements. If the business entrepreneur is in need of fast cash and at the same time wants to enter rewards against payment done on debts, then a business credit card can be the right option. However, the interest rates could be higher than traditional business loans.
It is advisable to opt for a business loan based on your business requirements. The information provided above will help you decide the type of business loan best suited for your venture.
Benefits of Business Loan
There are many benefits to taking out a business loan, including:
Flexibility in how you use the funds. Business loans can be use for a variety of purposes, such as Working capital to cover day-to-day expenses.
No sharing of profits. Unlike equity investors, lenders do not require a share of your profits. This means that you can keep all of the profits for yourself and your business partners.
No collateral is required. In some cases, you may be able to get a business loan without having to provide any collateral. This means that you won’t have to put up any assets as security for the loan.
Tax benefits. The interest you pay on a business loan may be tax-deductible. This can save you money on your taxes.
Quick disbursal. Business loans can typically be disburse quickly, so you won’t have to wait long to get the funds you need.
Improved business credit. Repaying a business loan on time and in full can help to improve your business credit score. This can make it calmer to get loans in the future.
In conclusion, business loans can be a great way to finance your business’s growth. However, it’s essential to weigh the benefits and risks carefully before taking out a loan. If you do decide to get a loan, make sure that you understand the terms and conditions so that you can repay it on time and in full.