Starting your venture or growing an existing business requires capital. Business loans help companies secure sufficient funding to operate. There are different types of business loans available in India.
In this article, we discuss the various types of business loans, their use cases, and their pros and cons.
What Are Business Loans in India?
Business loans are funding solutions offered by financial institutions. They are designed for several purposes, such as working capital, machinery purchases, business expansion, trade finance, etc. Borrowers can repay the loan amount in Equated Monthly Instalments (EMIs) as business loans usually have flexible repayment terms.
Related Reading: For clarity on approval requirements, borrower eligibility, and documentation across loan types, please read “What is a Business Loan: Meaning, Types, Eligibility”.
Different Types of Business Loans
The two main types of business loans are secured and unsecured loans.
- Secured Business Loans: A Loan provided with collateral
- Unsecured Business Loans: A Loan provided without collateral
Let us now discuss the various business loan types in detail.
Secured Business Loans
Secured business loans require collateral, such as equipment, real estate, or other valuable assets. Different types of secured loan options are available.
- Term Loans: A term loan for business provides a borrower with a lump sum for a fixed tenure. These loans are suitable for infrastructure development, business expansion, and capital expenditure.
- Equipment/Machinery Loans: Equipment/machinery loans are used by businesses to purchase machinery, essential equipment, or to smooth operations.
- Business Loan Against Property (LAP): Business loan against property (BLAP) is another type of secured business loan that allows you to borrow funds by pledging residential or commercial property as collateral.
When a Secured Loan Works Best
- When businesses require an extended credit period
- When the borrower has assets to pledge
- When businesses want to obtain a loan at a low interest rate
Unsecured Business Loans
Unsecured business loans do not require collateral. These loans are usually assessed on the basis of your business's financial strength, creditworthiness and business profile. The different types of unsecured business loans are given below.
- Working Capital Loans: Working capital loans in India are available to startups, individuals, entrepreneurs, and MSMEs to meet their daily business requirements. These are short-term credit facilities in which loan limits and tenure vary by lender, business turnover, and cash-flow assessment.
- Cash Credit / Overdraft Facilities: Cash Credit is an unsecured loan that allows you to withdraw funds up to the limit. This limit is based on your business’s financials, such as turnover and working capital needs. Interest is only charged on the loan amount you use.
- Short-term Loans / Micro Loans / Startup Loans: Startup loans/short-term loans provide capital for initial investments, business expenses for new venture launches, or equipment purchases.
Related Reading: Explore working capital, overdrafts, and fast-access funding options in detail through “A Complete Guide to Short-Term Business Loans”.
When Unsecured Loans Are Useful
- When you are seeking quick approval
- If you have a lack of mortgageable assets
- When you need short-term funds
Term Loans (Long-Term or Short-Term Lump-Sum Credit)
A term loan is a business loan that provides you with a fixed amount of money for a specific period, which you repay in regular instalments along with interest. These loans are categorised on the basis of duration:
- Short-Term Loan: Up to 1 year.
- Intermediate-Term Loan: 1 to 3 years
- Long-Term Loan: Over 3 years
Pros of a term loan
- Flexibility to choose a term loan as a secured or unsecured loan
- Predictable monthly payments
- Long-term loan with comparatively lower business loan interest rates
Cons of a term loan
- Require a strong credit history
- Early repayment penalties may be levied
Working Capital Loans
Working capital is a short-term loan that helps you manage daily operations, cash flow, employee wages, and make inventory purchases.
Working capital loans are usually suitable for:
- Businesses seeking quick funds for operational needs
- Those who are seeking a working capital loan without collateral to manage short-term credit needs.
Cash Credit and Overdraft Facilities
It is the flexible credit line that allows withdrawals up to the sanctioned limit. Interest is only applicable on the used loan amount. Some of the users who can benefit from this type of loan are:
- Wholesalers and traders
- Import export businesses
- Businesses with receivables pending clearance
Advantages
- Limits on this business loan may range from ₹10 lakh to ₹5 crore
- Enable annual renewal and periodic review of financials
Invoice Financing / Bill Discounting
Invoice Financing or Bill Discounting is another type of loan where you can get immediate funds against your unpaid customer invoices. It is suitable for manufacturers, B2B suppliers, and service firms with long payment cycles.
Pros of Invoice Financing
- Get quick cash
- Release cash that has been locked in invoices
- Meet short-term financing needs
- No risk to your assets
Cons of Bill Discounting
- Borrowings are allowed on commercial invoices
- Not the right loan option for those who are seeking a specific loan amount
Equipment / Machinery Loans
The machinery or equipment finance loan is another kind of business loan for borrowers who want to buy new equipment or machines for their business. It is mostly used by large companies in the manufacturing sector. The interest rate for this type of loan varies based on the lender, loan amount, borrower profile, and market conditions.
Loans Against Property (LAP) / Asset-backed Loans
A loan against property is a loan that allows you to borrow larger amounts by mortgaging residential or commercial property for a fixed period. Lenders may approve up to 70% of the property’s market value, and the tenure is generally longer than that of a regular term loan.
Start-up Business Loans / Loans for New Enterprises
A startup business loan in India is designed to fund a new company that has minimal assets and a limited credit history. It is a collateral-free loan that eliminates the need to pledge assets and also involves minimal documentation.
Such small business loans for startups offer flexible repayment terms to businesses that align with their new company's cash flow, and provide them with quick funds.
MSME-Focused Loan Variants
MSME loans are loans for companies and entrepreneurs that fall within the Micro, Small, and Medium Enterprise (MSME) category. It supports small and growing enterprises by providing smooth access to credit, lower interest rates, and government-backed schemes. It gives you working capital to buy new equipment, goods, and pay employees' salaries.
Such online business loans in India come with interest rates that typically vary based on lender type, borrower profile, and scheme structure.
Government-Backed Business Loan Schemes in India
Government-backed loan schemes support startups, micro businesses, and SMEs by improving access to affordable credit. Under the Pradhan Mantri Mudra Yojana (PMMY), micro-enterprises can access working capital and operational funding. Mudra loans are offered under the following categories:
- Shishu: Loans up to ₹50,000
- Kishore: Loans from ₹50,001 to ₹5 lakh
- Tarun: Loans from ₹5 lakh to ₹10 lakh
- Tarun Plus: Loans from ₹10 lakh to ₹20 lakh (as per borrower eligibility)
Loans up to ₹10 lakh are typically collateral-free.
Business financing is also supported through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme. CGTMSE does not give loans directly. Instead, it provides guarantee cover to banks and NBFCs, allowing them to offer loans without collateral of up to ₹10 crore, subject to scheme rules.
NBFC & Fintech-Led Business Loans
NBFC business loans are suitable for small companies and startups and provide fast, flexible credit without strict documentation.
Why apply for NBFC and fintech-led business loans
- Fast approval and disbursal
- Simple documentation and less paperwork
- Flexible repayment and EMIs options
- Point of Sale (POS)-based merchant cash advances for retailers
- Digital underwriting for startups with limited credit history
This loan is suitable for businesses that need fast access to small-ticket financing and working capital.
Here’s a quick summary of the types of business loans in India:
Summarising Different Types of Business Loans in India
Different types of business loans in India cater to your company's funding needs. A secured loan requires you to submit collateral to acquire a loan, whereas an unsecured loan is issued on the basis of your income and creditworthiness.
From startup loans to government-backed schemes, these funding options empower your business to manage cash flows and operations. Each loan type has different interest rates, repayment periods, tenures, pros, and cons, so make sure to compare them and choose the best loan for your needs.
Looking for loans to grow your business? Explore the various business loan options in India at Shriram Finance.
FAQs
Can I prepay a term loan? Are there prepayment charges?
Typically, you can prepay a term loan. However, it comes with prepayment charges or foreclosure penalties. This is true especially for fixed-interest loans. Prepayment charges vary by loan interest rate type and on the basis of lender policies.
How is the loan amount determined for working capital needs?
The working capital loan amount is determined by analysing monthly operating expenses, cash flow, and your business's current financial health.
Is GST registration mandatory for MSME loan eligibility?
GST registration requirements for MSMEs are based on business activities and annual turnover thresholds. Businesses with an annual turnover of more than ₹40 lakhs for goods suppliers and ₹20 lakhs for service providers should perform GST registration. Special category states have lower thresholds of ₹20 lakhs and ₹10 lakhs, respectively.
What are the categories under Mudra Loans?
Mudra loans under the Pradhan Mantri Mudra Yojana (PMMY) are divided into four categories:
- Shishu: Loans up to ₹50,000
- Kishore: Loans from ₹50,001 to ₹5 lakh
- Tarun: Loans from ₹5 lakh to ₹10 lakh
- Tarun Plus: Loans from ₹10 lakh to ₹20 lakh
Loans up to ₹10 lakh are generally collateral-free, while Tarun Plus loans depend on lender eligibility and terms.
Can I get 100% financing for new machinery?
Most lenders provide 100% financing for new machinery, whereas some offer 90% or less. The terms, availability, and interest rates vary based on the lender and borrower's creditworthiness.