Running a business requires adequate financing, particularly for capital expenses such as buying new equipment. The need for new equipment often means that your business is expanding. You need to scale up capacities to meet the growing demand of your customers.
If your business is growing, raising the funds will not be difficult. Several banks and non-banking financial companies (NBFCs) offer various types of loans for small and medium enterprises (SMEs).
Here are seven types of business loans available to fund the purchase of new equipment.
1. Line of credit loan
This is a short-term loan and ideal for small businesses. The interest is applied to the number of days that the amount was borrowed. It means, you will pay the interest from the day that you borrowed the funds until the day you repaid the amount, both days included. Such loans may be used for the purchase of inventory or for the payment of operating costs but are not beneficial for real estate transactions.
2. Installment loan
The lender sanctions the entire business loan amount, which is repayable in installments. You may repay the installments in monthly, bi-weekly, quarterly, or any period that may be convenient. The funds may be used for any purposes, such as to meet operational expenses or capital requirements. The interest is payable from the date of disbursement until the loan is repaid. There are no prepayment charges on such loans and thus, you can benefit from lower interest savings by repaying sooner.
3. Interim loans
Building contractors generally avail of such loans to complete the construction of the projects. The building remains mortgaged until the repayment of the entire loan amount. Because such loans are secured against the buildings, the lenders assume lesser risks. Therefore, the interim business loan interest rates are lower compared to other facilities.
4. Balloon loans
Under this loan, only the interest is repaid until the final installment, where the principal is repaid in a balloon installment. Businesses that receive lump sum revenues at different periods generally take such loans. The rate of interest on such loans is higher as compared to other credit facilities.
5. Letter of credit
A letter of credit is a guarantee of payments, which is provided by your bank to your supplier in another country. This is a common mode of short-term financing for businesses that involve international transactions.
6. Secured loans
A secured loan for business is available on the mortgage of fixed or movable assets against the borrowed amount. The lenders assume lesser risk in such loans, and therefore, offer a lower interest rate. Banks and NBFCs always prefer to offer secured loans.
7. Unsecured loans
A loan provided without mortgaging any asset against the borrowed amount is an unsecured loan. The interest on such loans is higher as the risk involved for the lenders is also higher. In case of default, the lender will have to rely only on legal assistance to recover the loan amount.
Having clearly understood the various types of fast business loans available, you may select the one that best suits your requirement. It is important you compare different options to make the right decision.
Apply for a loan today and take your business to new heights of success.