Working Capital Loan: Also called collateral-free loans, working capital loans are loans leveraged by businesses to meet their daily working capital requirements. Working capital loans are usually short-term loans with a repayment tenure of up to 12 months. Working capital loans come at a higher interest rate due to their short tenure.

Term Loan (Short & Long-term Loan): One of the most commonly availed loans, term loans are the ones that need to be repaid over a specific period of time. These can be broadly categorized into short-term loans (up to 12 months) and long-term loans (up to 5-10 years). The tenure for the same is set by the lender depending on the capital requested.

Letter of Credit: Used predominantly by businesses involved in trading, a Letter of Credit is a type of credit limit in which the lender provides funding guarantees to suppliers of the businesses. Since international trade, both export and import, tends to deal with many unknown factors, LoC is critical in ensuring successful trade.

Overdraft Facility: The overdraft facility is a type of loan offered by banks where the business owner is allowed to withdraw cash from their account even if the account balance is zero. The interest is charged daily on the amount utilized from the sanctioned limit. This type of business loan is usually provided against some collateral, typically FD with the bank.

Equipment Finance or Machinery Loan: As the name suggests, an equipment or machinery loan is provided by lenders to purchase equipment for the business. While the terms and conditions for this differ from lender to lender, businesses availing of this loan get tax exemptions from the government of India.

Loans under Govt. schemes: There are multiple loans facilitated by the Indian government specifically for startups. Some prominent government loan schemes in India include Mudra Scheme under PMMY, CGTMSE, Standup India, PMEGP, Startup India, PSB Loans in 59 minutes, etc.

Invoice Financing: Invoice financing is a way for businesses to borrow money against the amounts due from its customers. It helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can be structured in such a way that the customer is unaware that their invoice has been financed, or it can be explicitly managed by the lender.

Merchant Cash Advance: Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses’ daily credit card income, directly from the processor that clears and settles the credit card payment. The quantum of the loan is dependent on the volume of your monthly card sales value. Some lenders determine your eligible amount up to 200% of the value. Higher your sales; higher is the eligibility amount of advance.

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Some common types of unsecured business loans are:

Term loans: Term loans are financial assistance where a bank lends money to a business, with interest adding up over time, and regular repayments are made over a set loan term

Working capital loans: Working capital loans are the ones availed to ensure a constant flow of working capital to keep the business floating

Merchant Cash Advance: A merchant cash advance is an advance based on credit card sales deposited in the merchant’s account. The amount here is based on the number of credit card swipes or the monthly volume of transactions

Invoice factoring: This is a type of invoice financing where the business sells its outstanding invoices to a factoring company at a discount and receives a portion of the invoice balance as an upfront payment

Revolving credit: Revolving credit refers to an open-ended credit account like a credit card or other lines of credit that can be leveraged and repaid as long as the account remains open.

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The interest rates for a working capital loan can range from 11-16%. A company is said to have a positive working capital if it has enough cash, accounts receivable, and other liquid assets to cover its short-term obligations.

If a business has enough working capital, it can continue to pay its employees and suppliers, and meet other needs, such as loan interests and taxes, even if it runs into cash flow challenges. If the business does need to take another loan, showing a positive working capital can make it easier to qualify for loans and other forms of credit. A business can also avail of the working capital loan if it is seasonal in nature and has a good credit score. Seasonal businesses tend to have sales only during a particular season, which means that the business does not have a steady cash flow throughout the year. In such cases, working capital loans can come in handy. A working capital loan isn’t ideal if you have inconsistent revenue and are unsure if you will be able to make monthly payments.

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