Every size and type of business requires funds to operate. Whether the founders pool money or they raise funds from financial institutions, no business can sustain without adequate capital. The capital requirements also vary according to the size of the business. There are many types of business loans available for business owners. Business loans can be categorized into short-term, long-term, secured, and unsecured. Long-term loans, as the name suggests is a loan with a longer tenure and a short-term loan has a short duration. A secured loan is a loan, which has a collateral requirement and an unsecured loan has no such requirement.
However, when it comes to a loan for business, there are two main types—professional loan and trade loan.
1. Professional loans
Designed for self-employed individuals like lawyers, chartered accounts, and doctors, professional loans allow individuals to start or run their business. Such loans have a certain limit on the amount of funds that can be extended to the borrower. They are usually long-term in duration with a payback tenure ranging between five to seven years. The documentation required for this loan will vary depending on the lender.
2. Trade loans
A trade loan is designed to meet the needs of every size and type of business. The loan can be divided into three types—overdraft, term loan, and working capital loan.
An overdraft loan is based on some securities in bank fixed deposits. Depending on your credit history, repayment history, cash flow, and relationship with the bank, the lender will take an approval for a specific overdraft limit. After approval, the overdraft amount can be used and the interest is supposed to be paid to the bank only on the amount you used. You can use the funds as per your requirements. However, you need to pay the interest and principal amount on time.
2. Working capital loan
This loan is provided to your business as working capital and is issued against collateral. It has a lower interest rate as compared to overdrafts and the interest will be charged on the amount utilized by you. In this type of borrowing, you can utilize the money only to manage the daily operational requirements of the business and not for any other reason. This form of business finance will give control to the lender to monitor your cash flow, debtors, inventory, and receivables, among other aspects involved in business operations.
3. Term loan
This is a standard and very popular option when it comes to loans for small business. It can be availed for personal, as well as, business purposes, and the total amount will have to be repaid over the tenure in Equated Monthly Installments (EMIs). Term loans can also be taken in a foreign currency and hence they are known as foreign currency loans.
Consider the purpose of borrowing and then decide on the type of loan you require. You will have to submit the requisite documents and ensure timely repayment of the loan in order to maintain a positive credit history. Business loans allow entrepreneurs like you to take their business towards progress without worrying about the lack of funds.