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Need a loan for your business? Here is a guide to help you out.
India is home to around 6.3 crore micro, small and medium enterprises.The Udyam Registration portal, set up for registering small businesses in India, registered over 30 lakh MSMEs by May 2021. Given the dynamic business landscape in the country, it’s no wonder that many aspiring entrepreneurs are taking the leap and setting up their own businesses.
If that sounds like something you plan to do as well, you need to first understand business financing. Here are the details.
What is business financing?
Business financing, commonly extended in the form of a business loan, is a kind of unsecured financial support that banks and non-banking financial companies (NBFCs) offer businesses and companies. Business financing is offered to both existing businesses as well as new businesses. So, no matter at what point you may be on your entrepreneurship journey, you can find the financial assistance needed to kickstart your business or take it to new heights.
The different ways to use business financing
The needs of every business are different. Some may need additional plant and machinery, while others may need funds to meet their regular expenses. If you are planning to avail a business loan for your company, you may be curious about the ways in which you can use those borrowed funds.
Broadly speaking, there are not many restrictions on how you can use business financing. The only caveat is that the funds you borrow must be used for your business. Here are some common ways in which a business loan can be used.
- You can use the funds for purchasing inventory.
- These loans help you meet the everyday expenses in your business.
- You can buy machinery and other capital equipment for your company.
- You can use the borrowed money to pay off business debts.
- Business financing helps you launch a new product or set up a new branch.
- You can also use these loans to take care of marketing expenses.
What are the different types of business loans?
Businesses have different needs, as you’ve seen above. So, there are different types of business financing available in India, each with a distinct purpose. Here is a closer look at the most common types of business loans you can avail.
Working capital loan
Your business may have many everyday working capital needs, like paying employee wages, purchasing inventory, paying off creditors and accounts payables and meeting other day-to-day requirements. Working capital loans help meet these needs effortlessly. These loans are typically collateral-free short-term loans that need to be repaid within 12 months.
Letter of Credit
A letter of credit (LC) is a document that a bank issues, guaranteeing the ability of the holder of the LC to repay the creditor or seller. So, if you have an LC from your bank, it essentially serves to assure your suppliers that you will repay what you owe them. In case you are unable to meet your dues, your bank steps in.
Term loans are business loans that are to be repaid in regular instalments over a specified period of time. This repayment period can be as short as 12 months or as long as 10 years or more. The amount of loan you can borrow through term loans also varies a great deal, ranging from Rs. 1 lakh to Rs. 1 crore or more. The funds you borrow through term loans can be used for a variety of business purposes, unless there are specific conditions attached to them by the lender.
Overdraft facilities from banks allow you to withdraw and use more money than the funds you have in your account. These facilities come with a sanction limit, beyond which you cannot withdraw. The bank levies interest on the excess amount withdrawn. Typically, this interest is charged on a daily basis. The limit and the interest rate depend on the asset that you offer up as collateral.
This kind of business financing helps you purchase new machinery and equipment needed for your business. It’s for this reason that they are also known as machinery loans. The rate of interest, the repayment tenure and the maximum amount of loan you can avail vary from one lender to another, so check and compare your options before you avail equipment financing.
Small business loans
The government of India has launched several schemes that make it easier for MSMEs to obtain small business loans. These loans help small and micro businesses access business financing without any hassle. In addition to that, they also offer various kinds of tax benefits. Here are some of the schemes set up by the Indian government to make it easier for MSEMs to avail small business loans.
- MSME Loan in 59 minutes
- Pradhan Mantri MUDRA Yojana
- Credit Linked Capital Subsidy Scheme (CLCSS)
- Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
This guide should give you a fair idea of how a business loan can be used. You also now know about the different types of business financing available in the Indian financial market, so you can apply for the loan that best meets your needs.
A quick recap
- Business financing, commonly extended in the form of a business loan, is a kind of unsecured financial support that banks and non-banking financial companies (NBFCs) offer businesses.
- Typically, there are not many restrictions on how you can use business financing. The only caveat is that the funds you borrow must be used for your business.
- There are different types of business loans available, like working capital loans, letter of credit, equipment financing and small business loans.
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