9 Options to choose from for Small Business Loan

Table of Contents

Small businesses have a huge concern for gathering enough capital for the smooth operations of their businesses. The initial phase of any business is crucial and for it to get going and gain that momentum in the market some quick business funding is required.

Financing options available for Small Businesses

  1. Unsecured Business Loans
  2. Secured Business Loans
  3. Invoice Discounting
  4. GST surrogate
  5. Loan Against Property
  6. Working Capital Loans
  7. Machinery Business Loans
  8. Overdraft Facility
  9. Revenue Financing

1. Unsecured Business Loans

An unsecured business loan is one where a lender gives you a loan without any security. Due to this lack of collateral, lenders will lend smaller loan amounts, at slightly higher interest rates, for short loan tenures because lenders take on considerable risk when lending without any collateral.

This type of business loan is your best option when you don’t own any assets to offer the lender as collateral, you want to grow your credit history, or your business is in a growth phase, so you need cash fast. Since these loans do not require collateral, lenders do not need to spend time verifying the condition and ownership of the collateral provided. Therefore, unsecured business loans are easier and faster to get.

2. Secured Business Loans

Secured business loans can be understood as a funding instrument commonly sought after by small businesses. This type of loan is secured by a personal guarantee or by pledging assets/property as collateral. The collateral is seen as a way for borrowers to assure the lender that they will repay the loan over the tenure specified in the loan agreement. It also implicitly means that the lender has the right to take the collateral to custody in case they are unable to repay the loan.

Types of secured business loans

1. Secured by Collateral

This type of secured business loan includes any of the following to be pledged as collateral and must be owned by the business:

  • A property mortgage is the most common form of secured business loan. The higher the value of the mortgaged property, the longer the repayment tenure.
  • The government securities, fixed deposit certificates, and savings accounts.
  • Gold and other precious metals.

2. Secured by Personal Guarantee

Secured loans are also provided based on the business owner’s guarantee. In this case, property, land, or gold owned by the proprietor or partner can be considered for a collateral purpose. The property can be pledged as limited or unlimited liability.

3. Invoice Discounting

Invoice discounting also called Bill Discounting is a way in which a company can borrow short term funds from banks or financial institutions based on their outstanding invoices. Invoice Discounting is a manner in which businesses can raise short-term funds to meet short-term liquidity needs. Invoice Discounting is an alternative to a business loan or an overdraft facility. Under Invoice Discounting, the company provides the unpaid bills to the banks or financial institutions and in return, receives funds up to 90% of the outstanding bill value. It helps keep cash inflow from customers constant and they can pay within their normal credit period.

How does Invoice Discounting work?

Invoice discounting is one of the most popular methods for arranging working capital for business. Under invoice discounting facility, the invoice raised for the customer is sold to the bank or financial institution at a discounted price. This implies that the money that the business would receive at the end of the credit period is collected instantly. Generally, all lenders offer this facility at a predetermined percentage of the invoice value, which varies anywhere between 75% – 90% and the rate at which the invoice discounting facility is available varies between 1.5% – 3.00%. 

4. GST Surrogate

A GST Surrogate Business Loan is a product offering to MSME business owners to procure funding based on their GST record. If you are an MSME entrepreneur with at least 2 years of GST record, this loan would be the recommended choice for your business.

While the possibilities are endless, here are some common purposes for which a GST Surrogate Business Loan can be procured for your business:

  • Meeting working capital requirements
  • Procuring raw material
  • Fulfilling bulk orders
  • Maintaining a healthy cash flow
  • Purchasing inventory
  • Paying suppliers in advance
  • Paying for overhead costs like salaries, rent, office expenses etc.

5. Loan Against Property

 A loan against property is a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property’s market value, usually around 40 per cent to 60 per cent.

As the name suggest, it is a kind of a loan that is against the security of one’s property and also known as Home Equity Loans. It is designed to meet the financial needs of a person who already owns a house, which is free from any encumbrance which means it is not given as security for any purpose.

With a loan against property, you can overcome any cash crunch, especially that which requires a substantial amount. Whether you are paying for your child’s wedding, financing overseas education or starting a business venture, a loan against property can fund it all. However, the key to a financially stable life is retaining ownership of the property you have pledged, which is much easier to do when you have your priorities in order. Look at all you need to consider when you are taking a loan against property.

6. Working Capital Loan

A working capital loan will help you cover your daily expenses like paying salaries and suppliers and other overhead costs involved in running a business. A Working Capital Loan is not meant to fund your business expansion or asset purchase plans; it is a type of business loan that is used to meet your short-term financial obligations and operational requirements. The short-term liabilities could range from payment of monthly overheads to day-to-day expenses, purchase of raw materials, and inventory management. These are only a few examples of a business’s short-term operational requisites. With the aid of a Working Capital Loan, your short-term necessities are taken care of, and you have more space to plan and focus on your long-term goals. 

Such loans help you streamline your cash flows during slow periods and help you cover expenses without selling or mortgaging any assets. Some lenders may even give you a loan against your Accounts Receivables, where you pledge your invoices in exchange for immediate funds.

7. Machinery Loan

A machinery loan is a type of business loan taken for the purpose of financing the purchase of new machinery or equipment for a business. Modern business tools and state-of-the-art equipment are a great way to expand your business but finding the right financing for them can be difficult at times. A machinery loan makes equipment financing easy and removes any roadblocks in achieving business success. You should get this business loan if you want to invest in new business machinery or repairing machinery you already own.

Investing in new machinery is always a great idea. It improves your production capacity and quality and may also bump up the valuation of your company in case you’re looking for investors.

8. Overdraft Facility

An overdraft is a credit facility permitting an individual to withdraw money from the current account even in case of zero balance. This overdraft facility is useful for fulfilling short-term business objectives and requirements and during emergencies. The interest rate or the overdraft fee imposed over the withdrawal is determined by the financial institution availing this facility, and it varies according to the bank. Moreover, one can borrow money over and above his or her account credit balance.

Overdraft facility is a type of short-term loan to be repaid in defined tenure, as required by the financial institutions. Lenders shall levy the interest rates that the borrower needs to repay, as per the bank’s terms and conditions. In the case of Overdraft, the type of interest rates offered by the lenders is both fixed and not floating.

9. Revenue Based Finance

Revenue-based financing or royalty-based financing is a potential method of raising capital from a firm’s investors to meet business-oriented requirements. In exchange for the investment amount, individuals are entitled to receive a portion of the firm’s projected earnings, based on previous sales figures.

Investors continue to receive such pay-outs until they obtain a predetermined amount. Generally, the said predetermined amount is a multiple of their invested sum and tends to range between at least 3 to 5 times the principal investments.

Why apply with Omozing?

  1. We partner with over 40+ leading lenders in India, including ICICI Bank, Kotak Mahindra Bank, Lendingkart, to get our SME customers the right business loans for their needs.
  2. Easy and quick process of applying for small business funding.
  3. Our process is digital, saving you from wasting time and effort going from one lender to another. 
  4. We tell you upfront what documentation you will need to provide for the business loan, and we collect all the documents in one go. 
  5. If you’re not eligible for a business loan today, we’ll tell you why and what to do to become eligible in the future! 
  6. We have helped SMEs get unsecured business loans in 2 working days and secured loans in 7 days! 
  7. Maximum loan amount approval.