Understanding Different Loan Types available to Entrepreneurs

COVID-19 crisis has posed multiple challenges for organizations everywhere. Many entrepreneurs are  struggling to sustain good control over short-term cash flows and the working capital that drives them, however the COVID-19 crisis is unique in its combination of challenges making mitigation even more complex. If your business is directly or indirectly affected by Covid 19 pandemic, getting a loan from a bank or similar institutions is a good option for your business to tide over current crises. Different types of loans are available as per the need of an organisation. 

Commercial or Business Loans are mainly categorized either as:

Short-term Loans or Long-term Loans

Or

Secured Loans or Unsecured Loans

Types of Loans 

1. Term Loan - These are long term business loans that are taken for the purpose of purchasing long term assets like land, buildings and machinery. 

2. Cash Credit Facility - Commonly known as an overdraft, a cash credit facility is a short term borrowing that allows a business to borrow money flexibly from the bank. 

3. Letter of Credit - Most commonly used in the import/export business, a letter of credit is a guarantee offered by a bank that the seller will receive payment when certain conditions are met.

4. Business Loan against property - This is a borrowing against a piece of land or built up property. There is no restriction on how it can be spent.

5. Gold Loan - You can take a business loan against the gold and jewellery sitting idle in your home. 

6. Bank Guarantee - This is a service provided by banks where they promise to pay off the liabilities of a debtor if the debtor does not meet contractual obligations.

7. Invoice Financing - Invoice financing is also known as invoice discounting or invoice factoring. The financial institution provides funds against the amount raised in the invoice. 

8. Equipment Financing - It is the manufacturing businesses that usually opt for equipment financing or machinery loan. 

9. Startup Loans - This is a relatively newer category of loans meant specifically for new businesses.

Loan is not just money available to you. It is a liability that needs to be serviced. A professional team can guide you better on the type of loan suitable for your current need and status. Make sure you go for an option which covers your current capital needs and your business is able to service the liability easily.

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