Types of Loans for Small business and how to apply for them

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Nowadays, starting your own business is not an easy task or an easy phase to go through. It would require extensive planning, marketing strategies, and most importantly acquiring the necessary finances. For every small business owner, the funds required to be invested are always short to the actual investment required. The only possible road that small businesses go for to acquire finances is through loans. Some loans are favourable while some are not, depending on the interest rates. Let us have a look at the different types of loans for small businesses.  

Types of Loans in 2021 and How to Apply StartupYo

Documents Required for applying Loans 

While engaging in the process of acquiring a loan, you would need to carry a few documents that are necessary for availing of a loan. Almost all loan processes ask for the same documents that are mentioned below. We have included all the documents that are required, however, according to the type of loans the documents may vary. 
 
1. Identity Proof like Passport, driving license, Aadhar Card, Pan Card. 
2. Latest Income Tax Certificate 
3. Audited Financials for the past 3 years 
4. Address proof like electricity bill, ration card, etc. 
5. Statement from the Bank.  

How to Apply for Business Loans 

You are either going to avail of a loan through a bank or some financial institution. Each of them has almost the same method for applying a loan. The process of acquiring a loan can be online, you have to select the bank or the financial institution through which you wish to acquire the loan. You can visit the official website of the chosen bank and fill out an online form for a loan, if you are eligible you can get in touch with a representative of the bank and carry the further process.  

Different Types of Loans for Small businesses 

There is a huge misconception in the minds of many business owners regarding loans. Most of them do not even realize that if they do not acquire loans from the bank, they also have different options of availing loans through various other official and legal sources. Let us have a glance at a few of the sources from where you can acquire loans for your small business. 
 
1. Term Loans 
 
Let us begin with the most common type of loan that small businesses approach, it is called a Term Loan. Term Loan is availed in two forms, either a secured or an unsecured loan. You are granted a Term loan on an upfront basis, and you are meant to return the principal amount with the calculated interest rate to the lender. One of the best things about Term loans is that the interest rates are lower. The tenure ranges between 1 to 5 years for unsecured loans and up to 20 years if secured.  
 
2. Invoice Financing 
 
Invoice Financing is also called Invoice discounting. The lender, most commonly a Financial institution can lend up to 85% value of an invoice to the business owner. If the invoice is not paid, then the lender charges a fee weekly unless it is paid in full. 

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 3. Equipment Financing 
 
This type of loan is available for businesses that mostly deal with manufacturing and machinery. A loan is granted on the basis of equipment, and the same can be used as collateral to avail the loan, along with some other resource as a security. 
 
4.  Start-up Loan 
 
These loans can be availed mostly by Start-up owners, generally for small businesses. The loan is granted on the basis of a general credit profile of the applicant, and on meeting the eligibility criteria, the loan is granted. However, it can not be availed unless the business is established and proof of the same is given. 
 
5. Loan Against Property 
 
Generally, such a type of loan is not recommended for small businesses, however, there are few that require loans as close to 50 lakhs. In such a case, the loan is granted against the property of the applicant as security. Since the loan amount is higher, the property of the applicant is considered. The tenure for such loans is usually longer, up to 20 years as such. 
 
6. Business Credit Cards 
 
This type of option is rarely taken into account while availing loans for small businesses. However, if you are looking for quick cash, business credit cards are the best available option. It also gains you various rewards, cashback, and attractive offers. However, at the same time, the interest rates may be higher. 
 
7. Merchant Cash Advance 
 
It is a better option to avail when you can pay a loan on the basis of your daily sales. If your daily sale is good, you can pay more and vice versa. A financial institution provides capital in advance and the applicant has to repay according to the daily sales.  
 
8. Short Term Loans 
 
Similar to Regular term loans, in this type of loan the borrowed funds are usually paid back in a short period of time, let’s say between 3 months up to even 18 months. However, the loan amount would also be less, depending upon the term. You can conclude that the only difference between short-term loans and regular term loans, is the tenure. 
 
9. Lines of Credit 
 
This is a popular type of loan availed by small business owners who are in need of frequent cash. It is similar to Business Credit cards, you can avail funds at any point, however, the interest rates are lower compared to them. However, it is difficult to get qualified for this loan. 
 
10. Gold Loan 
 
Some small business owners also opt for a loan in exchange for gold. The amount is borrowed on the basis of the gold, the maximum amount can be 20 lakhs, the tenure is decided by the lender.   

Conclusion 

 Small businesses may require frequent cash or working capital funds and hence they can acquire various types of loans such as Term Loans, Invoice Financing, Equipment Financing, Start-up Loan, Loan against Property, Business Credit Cards, Merchant Cash Advance, Short Term Loans, Lines of credit, and Gold Loan. 

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