Welcome to our blog, where we don’t lock finance knowledge but unlock it. In this blog is a part of that in which we are discussing the different business loans. In this blog, I want to discuss particularly the types of business loans. That is how many types of loans are available for you. Now suppose if you do business or in future, you want to do business, so naturally for every business funds are required.
Now you can meet the fund requirement either from your own funds. Any investor can put money in your company to whom you can give some shares to him. And the second way is that you can take loans from a bank or from a financial institution. Or there are also some types of credit facilities that you can avail which is given by banks and financial institutes. So how many types of loans and credit facilities are there, we will discuss about this. Fund based credit facilities and Non-fund based credit facilities.
Term loans, working capital loans. In this video, we will be discussing all these types of loans and credit facilities. So you must stay in this video till the last. Let’s go towards the blackboard. So how many types of business loans are? Broadly it can be divided into two types. Fund based loans and non-funds based loans. Firstly, we will talk about Fund based loans.
Fund based loans are basically that where you can withdraw the funds whenever you want, whatever your sanctioned amount is. Suppose if your sanctioned amount is 50 lacs then you can take that 50 lacs amount up front together. Or else can be taken on different periods, it depends on which type of loan is sanctioned to you. So let’s understand that: how many types of funds based loans are there? First of all, is Term loans.
Now I’ve already made a detailed video about the term loan earlier. Even then, we summarise it for once. Term loans are basically short-term loans in which you basically purchase or create an asset, you get a loan for that. Now which types of assets are these? Suppose you want to buy land or want to make a building like some factory, warehouse or office, Or you want to purchase any plant and machinery for your office or any type of equipment. So for all these items, you will get loans. Generally, you get a term loan for a period ranging from 1 year to 5 years.
That’s why we called it a short-term loan. If you want a long-term loan so for that you have to get project financing. What is project financing? Suppose you want to create a large sized asset. For eg., any infrastructure or real estate project is there or large scale plants and machinery are there, big steel plants or coal plants are there, your infrastructure is road projects, pipeline projects, For these types of big projects. Or this project may be your factory suppose you are setting up a large setup.
So for that also you need project financing. The benefit of project financing is that you get a loan for the long term. So generally the project financing is for more than 5 years. And you can get a loan for 15 years,20 years,25 years easily. The third comes our Balloon loans. Balloon loans are basically a type of term loan but in this, you don’t have to pay principal payment along with. In term loan basically, your EMI is been created i.e. estimated monthly instalment or equated monthly instalment.
So your fixed instalment will come every month in which you will be paying both principal and fixed payment components. Right, Now, this payment of yours can be monthly or quarterly and also can be half-yearly. Right, But in the case of balloon loans what happens is that you pay interest during the term of the loans. But the principal amount that you are taking the upfront loan, you have to pay towards the end of the loan. Let’s say you have taken a loan for 5 years so your principal will be, basically, you will have to pay principal after 5 years. And interest rate basically whatever interest portion will be. It has to be paid during a period of 5 years if the timeline is 5 years. So you will keep paying interest during this time.
Alright, in the end, you will pay your principal at one time. So here I have written the principal. Then what are the other types of fund-based loans? One of them is a working capital loan. Now from a working capital loan understand that it basically have cash credit. Firstly, we will understand that; what is working capital? Now see that in every business there is a cycle of working capital. Suppose if we take an example of manufacturing so the first process will be purchasing the raw material. Then from those raw materials basically you will manufacture. So in the second process, it is manufacturing. Then you will do marketing of that product.
Right, so this will be your third process. Then you will do its sales after that you will get some money. So this becomes your fourth process. Now in this time period, it is possible that it can take 3 months. So this is your basically working capital cycle of three months. So now, the expenditure in these three months has to bear by yourself. Many times you will require a loan because it may be possible that you will not have enough money to run working capital. In that, you will get cash credit. Now, what is cash credit?
Assume whatever your inventory is or account receivable is; against them, you will get a kind of loan. From cash credit, you can fulfil your requirement of working capital. Then you also get a facility of overdraft. Now, what is an overdraft facility? suppose you have a current account in which you maintain an average balance let’s say of 2 lacs per month. so the bank says that you have a good credit history and you have good relations with the bank. So the bank says that if you ever need then you can withdraw money more than 2 lacs. Let’s say it sets your limit to 50,000. So this extra limit is called an overdraft facility. So now this overdraft facility can be secured or can be unsecured. If it is unsecured then you will get less limit.
If you secure it through any security let’s say FD against it you have taken this overdraft facility. So you will get the loan for that period for which your FD is. But if you take the unsecured overdraft facility then generally it is in between 1 week to 1 month not more than that. Along with that we have talked about cash credit which is available for 1 year. So you get this period maximum of 1 year. So generally this can be any type of your business, see I have taken the only example of manufacturing.
This can be your retail business or any import-export business. It can be any type of business that has multiple types of processes. And, your money will come after sometimes. You have to give goods on credit many times. Then, suppose if you do import and export business or are involved in any type of trading. Then one is your bill purchase and bill discounting. I’ve made a detailed video on this also. What happens in bill discounting? Your bill of exchange, discounting on it the bank gives you money immediately.
Basically, your money is going to come later so the bank finishes your liquidity issue, charges you an upfront interest. And gives you the money immediately. We call it business counting. Similarly, there is one more type of funding in trading that we called pre-shipment and post-shipment. Suppose if you sell any goods, assume you trade-in export and import. So you sold goods to anyone then the expenditure required in pre-shipment for warehouse and packing materials. To cover all these expenses you also get pre-shipment finance. And post-shipment finance is basically for cover the expense after the shipment.
Let’s say you required working capital, you have to pay salaries, you have to pay rent. So it can be done through post-shipment finance. This is generally used in international trading as I said, bill discounting and pre and post-shipment financing. So this is also one type of working capital loan like cash credit and overdraft facility to manage your working capital. Now let’s see more that; how many types of fund-based loans are more there. One is for your small and medium enterprises, you get an unsecured loan means you get a collateral-free loan. You don’t have to give any type of collateral for that.
There is generally many schemes are going on, some institutions promote small and medium enterprises. There are also bank’s schemes that are going on. So you basically get loans for startups Or you also get loans for your existing business. So it depends on basically what type of schemes any bank and any institution have. Yes, generally the business is in the field of retail trade then he doesn’t get loans. So generally the manufacturing types of units get it easily. Other than that, there are also government schemes are going on like now the Pradhan Mantri Mudra Yojana is going on. So you can also get a loan under that, this will be also collateral-free. These types of state-government schemes are also going on, so you can find out in your state.
Then suppose if you want to buy construction equipment if you are in the construction industry. So you definitely need the construction equipment. So you will also get a loan for purchasing construction equipment. This you get generally for a period ranging from 1 year to 5 years. Similarly, if you require a commercial vehicle then you can get a loan for it also. And basically, you get it also for a period ranging from 1-5 years. So these are all traditional business loans.
Other than that there are some loans which you used for business but also for other purposes. So like a Loan against property, which you can take for business reasons and for as well as personal reasons. Then there is Lease rental discounting for; if you have any commercial property which is on lease, and you get a fixed rent form that then you can take a loan against it also. You can take gold loans also. Then you can also take a loan against security if you have any FD, Mutual funds, stocks, bonds,insurance policy etc. by keeping them as security banks can give loans to you. If you wish then you can take also personal loans but remember personal loans and unsecured loans have high-interest rates.
You can also get unsecured loans if your company has a strong balance sheet. And if your credit record is good then also you can get an unsecured loan. Now see all these loans that I have told you are secured loans. Right. The interest rates they have is a little less. And if you take personal loans and any other unsecured loans, then the interest rates of unsecured loan is slightly high. You should remember this. I have made separate videos on all these loans if you want to know the details so you can watch my videos. Now we will talk about non-fund based business loans. So what happens in non-fund based business loans is that you can’t withdraw the funds, you will not get money whatever is it, suppose you sign an instrument so you will not get that money.
It is the only type of guarantee from the bank that if anyone defaults by the borrower mean that if you have given a bank guarantee to anyone or you have given any type of letter of credit to anyone. So if the default is from your side then the bank will be responsible for those funds will release them. So it is basically of two types one is Letter of credit and other is Bank guarantee. Letter of credit is generally used in international trade and many times in domestic markets. So generally the letter of credit is used when both the importer and exporter don’t trust each other. So when the banking system involves there the letter of credit is used.
Then bank guarantee is used in trading also, plus the government tenders that gets out; there, your Bid bond and Performance bond is to be submitted, they are submitted in the form of a bank guarantee. So you don’t have to pay the funds immediately, as you have given the bank guarantee. The bank is also not releasing funds immediately it only guarantees that if you did default, then the bank will pay money on your behalf. And the same is happening in the letter of credit that your payment is coming through the banking channel.
That’s all. Here, there are no funds that are released immediately, basically, it is a guarantee of the bank, that if there is a default then the bank will release the funds immediately. Now I have made detailed blog on the Letter of credit and Bank guarantee, if you wish then you can watch my blog too. In fact, I have made separate blog on every type of loan that is discussed here. If you want to know more about any loan then you can watch my blogs. I hope that through this video you have got the idea that how many types of business loans are there. And according to your requirement, I think you will be able to take a loan. I had tried to cover all the major points in these videos.
Then also if any point was missing or wan to add, you can comment it down. And don’t forget to like and share this video. It is my endeavour to share such detailed videos on finance with you.
