Our economical market is stuffed with variety of loans. There are various policies, terms and conditions that a business owner needs to follow when he is getting a business loan to fuel up his entrepreneurial prospects. The startup or small business owners are in search of availing such loans for numerous reasons like when they are financing a new infrastructure, purchasing new equipment to use in their developmental operations or sustain their manpower. Business loans work wonder in meeting the capital demands of such industries who require an initial infusion of capital for starting their business.
What does a business loans mean?
Business loan is basically the amount of capital a business requires to seed fund their startup that might aid in paying wages to its employees or for expansion until their business gets a footing of its own. These business loans are the financial support system for any budding organization. It is also a debt that the firm is obligated to pay as per the rules and regulations set by the financing body. The business owners can use the loan acquired in multiple ways like investing on setup of office infrastructure or any inventory etc. which the bank doesn’t interferes with. But, in this course the lender would likely need the details about the condition or status of the business.
Business loan is not just a single entity. There are various types of business loans based on different application of funds. For an entrepreneur, a detailed knowledge of these loans is extremely necessary. Let us have a brief look at those types.
- Term Loan: It is a type of business loan which is acquired for long-term fixed assets like a building or machines. Since it is a term, the loan needs to be repaid within a fixed time period along with interest rate. The repayment methods could be monthly or quarterly according to the guidelines of lending authority.
- Loan against property: It is the type of loan that a business acquires against his property or some land for his business prospects like expansion, manpower or any other requirements.
- Demand Loan: The borrower had to repay the loan to the financial institution or bank when it is demanded from him even if it is within a short period of time. These could be secured or unsecured and are usually acquired for short-term.
- Loan against Securities: Your insurance policy, mutual funds, fixed maturity plans, some bonds or shares can come into use when you want a loan to fulfil your business’ financial needs. These loans are only acquired when your financial securities are checked and approved by the bank.
- Cash Credit Facility: Eligible for a long-term or short-term, this facility is provided by bank in which the borrower can raise an amount more than what he holds to his credit against stock or assets like inventory etc. This facility works best for financing working capital like receivables.
- Overdraft Facility: In this facility the bank allows the customer to debit his current account below zero but only up to certain limit. The pledged securities by the customer are predefined by the financial authority.
- Letter of Credit: Under this condition the bank assures loan facility to the borrower on specified conditions. If the borrower is unable to pay back the amount, it is the bank’s responsibility to cover the remaining amounts.
- Bank Guarantee: It is a statement of promise made by the bank when the liabilities of debtors are not met and if the transactions are unsuccessful, banks are fulfilling the needs of beneficiary in the process when the other party is not able to conform to his demands.
With the business loans available in various forms and shapes, they have proven to be a source of great advantage for small business owners.
Some of these benefits are mentioned below:
- Contrary to what people believe, Business loans are quite easily affordable with no exorbitant sum to pay. The business loans are provided after checking out the financial condition of the business and the current market statistics.
- Business owners have an array of loan options to choose from. Whether their financial requirements are for a short term or they are planning on some long-term investment. Several facilities such as overdraft or cash credit are also helpful in this regard.
- A business loan has flexible repayment options and that too on a lower interest rate as unlike other commercial loans. A proper work-plan could be followed to avoid any disastrous financial situations while keeping the cash flow streamlined.
- When you have applied for a loan, the bank will not be a stakeholder in your venture as against the angel investors who are looking for a little stake in every company they invest. Bank just needs timely repayment of loans with interest.
- You get to enjoy tax benefits and a momentary relief from tax as that percentage of amount goes in repayment of your loans.