Business loans are credit facilities which help an enterprise or firm fund various business-related expenses. Banks and credit institutions offer various types of business loans to meet specific business requirements of customers.
Commercial loans or business loans can be categorized into:
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Business loans can be broadly divided into two main types of loans. Those which can be availed from commercial banks and financial institutions i.e. professional loans and trade loans. Discussed below are the categories of business loans:
Professional Loans: Professional loans are generally sanctioned for the self-employed like doctors, architects, lawyers or chartered accountants who want to set-up their own firms or seek to expand existing business. These loans have specific eligibility criteria that must be fulfilled by the applicants. The quantum of loan sanctioned under professional loans and interest rates vary across banks.
See Also: Taking Business Loan from Private Banks
These loans are generally sanctioned based on the credit score of the applicant and the latter’s relationship with the bank. These are unsecured loans whose repayment tenure ranges from 5 to 7 years. However, the banks also approve professional loans by seeking collateral as security.
Trade Loans: Trade loans are a type of short-term credit facility, mainly used by exporters, importers and domestic traders. Trade loans are a flexible loan available to businesses, regardless of their method of business. These loans are availed to fund transactions during the trading cycle of a business. These loans help the business bridge the gap between the sale of goods and the time before payments are received. Trade loans function as revolving credit facilities, that can be used for the payment of goods purchased, while receiving extended credit terms. Trade loans can be further categorized into 3 types:
Overdraft: An overdraft is an agreement between the account holder and the bank, where the bank approves an overdraft limit up to which the account holder can withdraw funds. The overdraft limit of the account holder is determined based on credit history, repayment history, income and relationship with the bank. The overdraft facility is like a short-term loan, where the account holder has to repay the principal amount along with interest. There are no preconditions on the usage of the overdraft amount. However; the overdraft loans are usually provided against collateral like a bank fixed deposit.
Working Capital: A working capital loan is usually availed from a bank or financial institutions to finance business operations. Working capital is generally availed to fund day-to-day expenses required for operating a business. The interest rate on working capital loans is generally lower than overdraft facilities. These loans are meant to be utilized only for business purposes and so the banks require proper documents for sanctioning the loan. However, banks conduct a thorough verification of the financial health of the business along with a documentation check, before approving the working capital loan.
See Also: How To Get A Business Loan From A Bank?
Term Loans: Term loans are a type of credit facility offered by banks, where the sanctioned amount can be utilized in any manner i.e. for personal purposes or for business purposes. The amount is disbursed at one shot and the borrower must repay the loan in monthly instalments over a set tenure and pre-specified interest rate. The term loans can be raised to meet the financial requirements of a business like site development, purchase of machinery, working capital needs, business expansion, purchase of vehicles or office equipment.
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