Almost every business requires funds to keep its operations going smoothly. But how you raise these funds determines whether you can run your operations the way you want. As a startup founder, you already deal with many things in your company, especially making critical decisions to ensure business success. Then it wouldn’t make sense to raise funds for your company through a method that won’t be suitable to your business model or company vision.
Bigger companies do not face such fundraising issues as they have better creditworthiness and a higher possibility of generating employment and profits.
Many startup founders make the dreadful mistake of not knowing their options when raising funds for their companies. They restrict their fundraising to conventional ways that may not be suitable for modern companies with a dynamic business model and transform rapidly.
Therefore, founders must look for different types of business loans and choose the one that makes the most sense for business requirements. To avoid facing the consequences of choosing the wrong fundraising method and ensure business success, founders must choose the right business loan for their company. This article will help with everything you must know about different business loans in India.
1. Working Capital Loan
Every business consists of numerous operations that are essential to the company. These operations are part of various business processes like sales, marketing, legal, human resource management, etc. The efficiency of these operations can significantly influence business success. Operational costs are incurred to keep the company running these essential operations. The operational cost can include salaries, lease or rent, security, and many more. Companies must have enough working capital to support these operations and provide a smoother workflow.
A working capital loan is a special, short-term loan taken by companies to maintain the smooth running of their daily operations. The working capital loan is especially beneficial for companies that don’t have a reliable and steady revenue generation stream yet. This type of loan offers you working capital to keep your core operations running. Depending on the loan amount and terms, these loans can range from 3 to 20 months. The working capital loan is suitable for a business in demand in the market and needs to push a lot of money into daily operations.
2. Term Loan
Companies often have to make radical changes to their business models, pivot their products, or expand into new territories. These steps can have a massive impact on business operations and require much more money than covering the operational cost. In such cases, businesses prefer term loans which are bigger in amount. Term loans can be secured and unsecured.
The secure loans have collateral as a security, so these loans have a tenure of 15 to 20 years. Unsecured loans with collateral security need to be paid off earlier and have a tenure of 1 to 5 years. Companies take term loans for growing their business and for capital expenditure. The financial institution offers a term loan based on the company’s credit history. And the rate of interest can either be fixed or floating.
3. Equipment Financing Loan
Manufacturing companies require machinery and equipment for production. Without these pieces of machinery, they cannot manufacture their products and sell them. But these pieces of machinery and equipment can be very expensive. Many businesses cannot afford to buy this machinery on their own. In such cases, an equipment finance loan can be an excellent solution for buying your company’s machinery and equipment.
This type of loan is specially offered to purchase machinery, and the borrower might need to present the paperwork to prove they have bought the machinery from the loan money.
Equipment loans often require security as collateral. These loans’ tenure can range from 1 to 3 years, and interest rates are comparatively lower than other types of business loans in India.
There are other types of business loans, such as business overdrafts, invoice financing, merchant cash advance, Loan Against Property (LAP), Business Credit Cards, etc.
Finding the correct type of business loan in India can take time, especially when you are in the initial phase of your company. Knowing your options to take a business loan can help you secure the best loan for your business and ensure your business’s success. So, before you choose the business loan, ensure it is suitable for your business and understand the loan agreement terms to avoid any mishap with the lender.
Most investment types need the founder to dilute the equity and offer it to the investor for the return on tier investment in your company. Many startup founders are skeptical about cutting their equity to the investor. In such cases, it’s best to choose revenue-based financing. Unlike traditional investments like seed investments and venture capital, revenue-based funding doesn’t require losing any portion of your equity. The founder can retain all the equity and only pay the investor monthly from the revenues. So if you want to avoid dealing with the hectic business loan processes, you must choose revenue-based financing and navigate your company toward success.
