Types of Business Loans and Which One is Right for You
Businesses, big or small, require a constant sum of funds for operations. Whether you pool in money from the market or avail business loans – the outcome depends on the size and nature of the business.
However, most businesses require funding when they are in a growth stage which requires excess funds for implementation as well as overall business sustainability.
Different businesses require different financial dependencies, which is broadly spread out between short-term and long-term loans. These loans lent by financial institutions have a fixed tenor.
There are numerous types of business loan based on multiple pointers. Each type can suffice as an ideal funding option to raise capital for your business.
Following is a brief guide through all of them.
Types of business loans based on duration or tenor
Business loans are categorised into 2 classes based on tenor –
- Short-term loans
Such loans have a short tenor, e.g. –6 to 12 months. They cover aspects like personal loans, bridge loans, consumer loans, etc. Both individual and corporate entities are eligible for such short-term advances.
Short-term loans are mostly easy to avail as the loan amount involved is small, and eligibility criteria are relaxed. However, an above-average interest is levied on them.
Financial institutions check the borrower’s repayment capacity along with financial stability before approving such a business loan. Due to higher interest rates, most SMEs and MSMEs hesitate to avail loans from these institutions.
Leaders provide short-term business loans at attractive interest rates. Moreover, an applicant required to fulfil eligibility criteria to get the loan approved. So it is required to have a look on required business loan documents and eligibility beforehand. Furthermore, the loan sanctioning time is quick (even less than a day.)
- Long-term loans
These loans have a significantly longer tenor that can extend from 3 years to 30 years or so. Long-term loans are availed to meet a diverse financial requirement and repaid in easy EMIs. For instance, home loans, MSME loans to purchase machinery, etc. fall under this category. These loans allow borrowers to enjoy maximum benefits from schemes provided by various financial institutions.
Based on collateral
A borrower must understand the nature of a loan before availing one. Business loans can be both secured and unsecured.
Here are the key differences between these two –
- Secured loan
Secured loans are lent to the borrowers who have to pledge an asset against the loan amount borrowed.
So, if a borrower is approved for a secured loan, they will mortgage or hypothecate an asset as collateral to the lending authority till completion of the loan tenor and repayment. Failure of repayment will lead to the lender taking possession of that asset. The financial institution may further proceed in liquidating the said assets to negate the outstanding debt. Examples of secured loans include loan against property, car loans, etc.
Bajaj Finserv offers collateral-free business loans at competitive rates. Know how to avail these collateral-free loans easily with prior knowledge of their eligibility criteria.
- Unsecured loan
These loans are provided to an applicant without pledging collateral to any lending body. These types of business loans are procured based on the applicant's credit score and income details. As there is no collateral involved, the risk factor is generally low for the borrower. Therefore, most financial institutions charge a comparatively higher interest rate as compared to secured loans.
Nevertheless, one can avail an unsecured loan for personal or business funding from prominent NBFCs like Bajaj Finserv who offer these loans at attractive interest rates.
All prominent financial and non-financial institutions offer business loans. Having a preliminary idea of the types of business loans will help you find one to suit your business requirements. It is advisable to opt for lenders who make your repayment easier with additional loan term benefits.