What Are The Different Business Loans Lenders Offer?

by Arjit Chalmela Finance Student

Business loans are an essential requirement for any business. Banks and other financial institutes play an important role in the country's economic growth by providing capital to businesses for their expansion. Whether it is a large company or an SME, business loans form the basis of capacity expansion.

With the growing complexities of business, the not same type of business loan is given. These loans are customised for each company depending on their needs. Companies need to learn and understand the different types available so that when they need funds, they can apply for the right one. Each one has a distinct characteristic and structure along with an interest rate system:

Term loans

These are long term loans that are extended for buying fixed assets like land or constructing buildings. They have the longest repayment tenure. The interest rates are set with a standard EMI repayment schedule. Term loans also get extended for buying heavy machinery that is either constructed or assembled in the factory.

Trade finance

It is a loan offer for import and export operations. This includes funding purchase orders for an exporter, covering the transport, shipping the order, providing bank guarantee, and credit for an importer, providing short term loans to transport the import order from the customs or port of entry to the business premises, providing funds to pay customs duty, etc. Trade finance covers broad activities related to the import and export of goods and services.

Working capital finance

It is a business loan that manages the daily operations and includes overdrafts, working capital, invoice discounting, which are used to plug in temporary cash shortfalls in the business operations. The standout feature is that the business loan interest rate gets charged on the amount withdrawn, not on the amount that gets sanctioned.

Under invoice discounting, the discount gets charged by the factoring agency, and the balance gets paid to the company. The factoring company has the responsibility to collect the customer invoice.

Equipment Finance

This is when you can buy new equipment in instalment for covering the purchase price. There are also lease agreements where lease rentals get paid to the manufacturer to protect the equipment cost plus the interest costs. Equipment finance gets arranged by the manufacturer and the lender. Aircraft companies generally take equipment finance and lease agreements to acquire aircraft since the purchase price is massive.

Unsecured loans

These include loan against property and other unsecured loans given by lenders to small businesses for purposes like office expansion, etc. They act like personal loans. Banks provide business loan specifically to SMEs for their small expansion needs.