7 Most Common Types of Loans

Loans are to help you in times of capital crunch in business. There are various types of loans available as per your requirements. However, it is important to know which type of loan suits your requirement before you apply for one.

Loans are usually categorized into two types: secured and unsecured loans. Secured loans are those where the collateral is involved and unsecured loans are those that do not require the collateral.

Out of several types of loans, we will discuss 7 most common types of loans available:

  1. Working Capital loan: This kind of loan helps meet the daily expenses of the business such as purchasing stock, payroll, buying machinery, etc. Primarily, these are short-term, unsecured loans with high-interest rates as collateral is not involved.
  2. Term Loans: These loans are loans given for a fixed period and need to be repaid in a stipulated number of installments. Term loans could be short-term or long- term loans ranging from 1 year to 10 years. It has a fixed rate of interest. The repayment period of the debt amount is fixed before giving out the loan.
  3. Letter of Credit: It is like a contract between the bank, the customer, and the beneficiary, where the bank gives a letter of credit guaranteeing that the beneficiary will receive the full amount once the conditions of the letter of credit are met. This kind of loan is taken generally for international trading.
  4. Bill Discounting: Also known as invoice discounting. Bill discounting is a contract in which the bank gives a loan after deducting the interest rate on the total amount of the invoice. The Bank takes the customer’s bill drawn by the borrower and pays it instantly to the borrower after deducting some amount as a commission or discount. At the due date of the Bill, the Bank presents the Bill to the borrower’s customer, who then pays the Bank. In case, if the borrower or his customer fails to pay the bill on time, the Bank charges them a predetermined interest rate.
  5. Overdraft Loan: The term “overdraft” refers to credit provided by lending institutions. This type of account lets the borrower deposit funds over the loan amount and withdraw funds as needed. You open a bank account with an overdraft limit from the lender. With a personal overdraft, the account holder may continue withdrawing money, even if there is no money in the account. A bank overdraft allows customers to borrow a specific amount of money that carries interest, and there is usually a fee for each overdraft.
  6. Equipment Finance: It is a credit facility that helps you fulfill all the needs of equipment and machinery in business. If you need to purchase new equipment and machinery for your business, you can go for an Equipment financing loan. The machinery or equipment that you purchase is considered as collateral and in case of default in repayment of the loan amount, the lender has the authority to seize the assets and recover the loan amount.
  7. Point-Of-Sale (POS) Loans: Merchants use point of sale financing when they assist their customers in purchasing a product or service by offering them a consumer financing option at the point of sale. Customers can apply for a one-time installment loan at checkout to break up their purchases into smaller monthly installments. Other times, consumers register for payment platforms that partner with specific retailers and give them the option of choosing a payment plan when checking out. Generally, the interest rates are high in POS Loans.

To avail business loans or guidance regarding any types of loans, get in touch with the Capital 9 team of finance experts.

 

 

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