What are the different types of business loans?

business loans

Businesses are always in need of funds, be it big or small. Whether the promoters raise funds or pool in money from the market, depends on the size and business viability. Sometimes, it also depends on the nature of the business, i.e. is it capital intensive? What are the stages of development concerning inception, maturity, or growth? Typically, companies need money the most during the growth stages as they take the business to the mature stage with the help of depreciated and working capital needs. 

Commercial or also known as a business loan are categorised as follows – 

  • Short-term loans
  • Long-term loans 

They are also referred to as: 

  • Secured loans 
  • Unsecured loans 

But in India, loan for business are broadly of two kinds – professional and trade loans. Let us learn about them: 

Professional loans

Such loans are extended to independent professionals such as doctors, chartered accountants, and lawyers. These are offered depending on their credit history. It also varies from bank to bank as to how much loan they can provide to the individual and relationship with the bank. Such loans are provided based on the personal rapport between the two parties. In some instances, collateral is taken as security. These collaterals are agricultural land, National Savings Certificate, Government Bonds, Bank’s Term Deposits, Insurance Policies, etc. This happens when the loan tenure is high, and the amount is between INR 15 to 20 lakh. 

A business loan is a long-term one with a tenure ranging between five to seven years. The documents needed for applying for such loans are – 

  • A detailed plan on the utilisation of funds 
  • Business expansion plan 
  • Financial statements for the last 12 months, which includes bank statements, CIBIL report, etc. 
  • Collateral higher than the loan amount 
  • Business-related documents 
  • Last two years balance sheet and ITR 
  • Personal Credit References 

Trade loans 

The kind of businesses that can apply for trade loans are –  

  • Sole Proprietorships 
  • Partnerships
  • Private Limited Companies 

Trade loans primarily include three aspects – 

  • Overdraft
  • Working capital loan 
  • Term loan 

Let us understand how each of these functions: 


Overdraft loans are based on some security; especially bank fixed deposits. A bank, based on the credit history, cash flow, tenure of the banking relationship, and repayment history of the business, take approval for a fixed overdraft limit. Depending on the limit, the overdraft amount gets utilised and interest charged for the same. This loan can get used in any manner if the principal and interest amount get repaid. Overdraft limit is also available individually for personal purposes and given if you hold a decent credit history. 

2.Working Capital Loan

Such a loan for business is offered to companies as regular working capital. This loan also needs collateral and have lower interest rates than overdraft loans. Interest rates here, get charged on the amount utilised and not on the entire amount sanctioned. Under the working capital loan, the bank sets a limit for the business to take loans and the amount used for the desired purpose only. Such loans get approved against the defined purpose and the business plan. The banks take complete control of monitoring the order book of the company with the debtors, cash flow, inventory, etc.

The bank can also reject the loan if the desired parameters do not adhere to the banking standards and norms. Thus, banks prefer giving working capital loans as the entire audit, and control is under their supervision. This also helps them control the profitability and working cash flow of the business. This, thereby, reduces the default chances. 

3.Term loans 

This is a standard business loan which is useful for business and personal purpose. The entire amount gets disbursed and is EMI-based for the set tenure. Also, the interest rates are predefined for the set tenure. You can take such loans in foreign currency as well and often called foreign currency loan. Such loans are extended to exporters who deal with different currencies. Such loans are cheaper than regular domestic ones. 

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