Banks provide collateral of Credit Guarantee backed loan and can be anything from a commercial vehicle loan to office equipment loan. Loans between Rs 10 lakh to Rs 1 crore are available under this scheme.
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By Rishi MehraBusiness needs are different and this means when you are looking to raise debt, there can be a range of options available to you. We list a few types of loans that you can consider when looking for money. The list is not exhaustive, but should give you a fair idea about the choices.
Working capitalWorking capital loan is one taken to overcome short-term shortage of cash. This is generally used to when cash in the business is not enough to take care of the day-to-day operations of the company. Working capital loan is a great way to overcome the seasonal shortfall of cash, irregular cash flow or to cater to a sudden spurt in business. A manufacturer, service provider, retailer/wholesaler or a trader engaged in imports / exports can apply for working capital loans.
Working capital loans are generally in the range of 6-12 months and interest rates depend on the credit assessment of the firm, but can depend anywhere between 12-16%. Banks generally ask for collaterals, but new age financial companies have been known to provide collateral free loans. Collateral can be anything like residential, commercial, industrial property, or even shares, stock, book-debts and gold. Credit facility under a working capital loan is generally around Rs 25 lakh and one can expect processing and renewal fees to be associated with such loans.
Some types of working capital loan include business line of credit, cash credit / Overdraft, Packing Credit and Post Shipment Finance. There are other modes of working capital loans, primarily for the export community, like Letter of Credit (LC), but the RBI has recently banned Letter of Undertaking.
On the other hand, line of credit is popular where a business has a certain amount of fund that is earmarked and that can be tapped in a revolving manner.
Different types of business loans that you can go for
It works pretty much like a credit card where you have a certain sum of money available and you have the chance to utilize it in tranches and repay it back within stipulated time and after paying interest. The interest rate on line of credit is lower, but can go up if you fail to repay within a stipulated time.
These are standard loans where you apply for a apply for credit for a specific purpose and get a lump sum amount. These are long-term in nature and often utilized for capital expenditure. The tenure is fixed, the amount of loan available is generally higher and depending on the credit profile of the business, the rate of interest can be lower. Lenders prefer term loans to be backed by collateral, but in some cases it can be unsecured in natureTerms loan can range between 5 to 20 years and can have fixed or variable interest rates. Such credit will appear in your books of accounts as debt and you will need to show why you want the loan, your financial projections and your repayment capability.
Equipment financingThese types of loans are predominantly for the manufacturing businesses. Equipments can be costly, but can be crucial for the operation and expansion of a business. To purchase equipments, most banks have specialized loan products to meet this need and tends to be at the upper limit of Rs 25 crore.
However, some banks are known to have equipment financing products for as high as Rs 100 crore. The tenure for such loans are fixed and maybe in the range of 4-5 years, interest rates can be lower than term deposits and the equipment is generally taken as a collateral, along with some additional security.
Most banks offer manufacturing equipment loans, but banks also have specialized product around construction equipment loan. IT and office equipment and healthcare equipment loans are also provided by banks.
Invoice financing Invoice discounting and financing is a powerful tool to raise capital. This can provide a great way for small businesses to find working capital. There is often a time lag between when a business raises an invoice and when it finally gets paid. In such a situation you can approach a bank or a financial institution to provide you a loan against the invoice. About 80% of the invoice amount is given as a loan and the remaining 15% becomes due when the invoice is paid in full by the customer. The lender will deduct the processing fee and interest, which is generally very low, from this amount.
The Receivables Exchange of India Ltd (RXIL), a joint venture promoted by Small Industries Development Bank of India (SIDBI) and the National online payday NH Stock Exchange of India Limited (NSE) is a great way to get invoices financed and small business should consider registering on such platforms.
Pradhan Mantri Mudra YoMY) is a scheme specifically for the MSME industry in the non-farm sector. These loans are given by Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs. The loans under this scheme is available under three products – Shishu, Kishore and Tarun to signify the stage of growth / development and funding needs of the enterprise.
Shishu generally covers loans up to Rs 50,000, Kishore between Rs.50,000 to Rs.5,00,000 and Tarun covers loans between Rs 5,00,000 and up to Rs. 10,00,000. The loan can be used to but a commercial vehicle, car loan and Two-wheeler loan, loan for working capital requirement, buying plant and machinery, renovating offices etc. Collateral under this scheme is not needed.
Stand Up India This scheme is targeted at entrepreneurs from the Scheduled Caste (SC) or Scheduled Tribe (ST) and Woman borrower to set up a venture (not meant for enterprises which has already started operations). In case of non-individual enterprises at least 51% of the shareholding and controlling stake should be held by either an SC/ST or Woman entrepreneur.