There are various types of businesses being run to satisfy a wide range of needs. It may be a manufacturing company or a service-based business or a business that acts as a market place, the need for finance is a common line that binds all of them.
The more diverse the business, so is the need for various types of finances. In order to meet the financial needs, banks and various financial institutions have come up with a number of types of loans/ credit lines that a business can apply for.
Through this article, we look at some of the common options for business loans that any business owner should be aware of.
Overdrafts are a form of extension of credit which is allowed by the bank/ lender where the business account is held. The overdraft may be allowed against the security like a Fixed Deposit or some other Securities. The grant of overdraft is also dependent on the banking history and credit score of the business.
The limit for overdraft is generally set in advance and interest is charged only on the amount utilized by the business. Overdraft is an ongoing facility and the end utilization of the facility is not set.
Working Capital Loans
In addition to capital expenditure, a business also incurs expenditure on day to day operations. In theory, the business should be making enough money to incur this expenditure. However, there may be a delay in realization of money from debtors or the business may receive a big order for immediate delivery. To meet the requirements of these nature, a business may go in for working capital loans, which may range for a period of a few months to a year.
These loans may require a collateral depending on the amount of loan.
Merchant Cash Advance
We are in the digital world and therefore, card transactions are a norm everywhere. However, businesses who get paid by card often need cash immediately for running their operations, but getting cash from the credit/ debit card companies often takes time.
This is when the businesses can take advantage of merchant cash advance credit, wherein you can avail an advance on these collections. This could go as high as 200% of your monthly card collections.
With facilities such as merchant cash advances, you do not have to wait till the cash is paid and your finances can be easily planned.
Invoice Financing or Invoice Discounting
On the lines of merchant cash advance is the invoice financing. However, the major difference between the two is that while under merchant cash advance the business has already received cash, in case of invoice financing, the cash is yet to be received from its debtors.
In the real world, much of the business transactions happens on credit and various durations of credit are generally allowed to the buyers depending upon their relationship with the company and promptness of earlier repayments.
However, by giving credit, businesses lose out on availability of immediate cash. Therefore, businesses can approach banks and other financial institutions for invoice financing. The lenders pay about 80% of the amount of invoice upfront and rest 15-20% is paid once the buyers pay up. A small service fee and a low interest is charged here.
Small businesses in India can benefit from registering at the Receivables Exchange of India website for invoice financing.
Another way of financing that is particularly beneficial to the smaller businesses is invoice factoring. The way invoice factoring works is similar to invoice discounting or financing. Even here, the financier provides the required cash to the business against invoices receivable.
However, the main difference between the two methods of making use of unpaid invoices to finance your business is that in the later (invoice factoring), the responsibility of realizing payment for the invoices is taken over by the lender.
This works for small businesses as they get the much-needed cash and would be relieved of the responsibility of getting the payment for their invoices.
These are loans specially designed for self -employed professionals like Chartered Accountants, Doctors, Lawyers, Architects, Civil Engineers, etc. These loans are approved based on the personal credit history of the professional. These are also approved against a security such as fixed deposit, assignment of a life insurance policy, Government bonds, stocks and shares of a company, etc.
These loans could be short or long term depending upon the amount borrowed.
A business may need expensive equipment for manufacture of various goods. It may be difficult for a business to finance the equipment on its own, which is when the business may approach a bank or financial institution to lend money to buy the equipment for the business.
These loans are approved with the equipment as the collateral. These are generally short-term loans ranging between 4-5 years.
Other equipment heavy businesses like hospitals, real estate developers, etc. can also approach for availing equipment financing.
Pradhan Mantri Mudra Yojana
This is a scheme introduced by the Government to support MSMEs. Under this scheme, the businesses can avail loans depending upon their stage of growth. The loan is approved under 3 heads, namely
Shishu, which can be availed for starting a business - Loans up to Rs 50000
Kishore can be availed for building a business with loan amounts ranging between Rs 100000- Rs 500000
Tarun for established businesses who can avail loans between Rs 500000- Rs 1000000
Loans under this scheme can be availed at all nationalized banks, Small Finance Banks, NBFCs, Cooperative Banks, MFIs, etc.
The avenues available for finance are many; all that a business needs to do is to be responsible with credit so that future credit is easily available at favourable terms whenever it needs.