Introduction
Business needs money. Whether you require money to grow, purchase new equipment, or cover day-to-day expenses, you have various alternatives. Business loans and advances are two major financial instruments that enable businesses to grow and cover cash flow. However, they are different in many ways.
This article will discuss business loans and advances, business loan types, major differences, and how to select the best for your MSME business.
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What is a Business Loan?
Business loan is borrowed finance from a financial company or bank to help the businesses meet their business financial needs. The borrowed loan and interest are to be paid back in a stipulated time. The business loans may be secured or unsecured. A secured one requires collateral, while an unsecured one involves no collateral. Several banks and non-banking financial companies (NBFCs) offer collateral free business loan to small companies.
What Are the Types of Business Loans?
There are various types of business loans for various requirements:
- Term Loan:A term loan is a loan in which a fixed sum of money is borrowed for a specified duration (typically 1-10 years), paid back in periodic installments, and often taken for long-term investment or the purchase of business assets.
- Working Capital Loan:It is a short business loan taken for meeting daily running expenses, such as paying salaries, purchasing stocks, and other utilities.
- Machinery Loan: It is a business loan that is meant to assist MSMEs in financing the acquisition, leasing, repair, or upgrading of machinery and equipment for their businesses.
- Invoice Discounting:It is a way for MSME business owners to get quick cash by using their unpaid invoices. Instead of waiting for customers to pay, the business borrows money from a lender using those invoices as security.
- Overdraft Facility:An overdraft facility is similar to a loan from a bank on an emergency basis. It permits you to spend more than you have in the account, up to a specified credit limit.
- Business Line of Credit:It allows MSMEs to withdraw a specified amount of cash that they can borrow at any time. Then they only pay interest on what you borrow, not the entire limit. When you pay back what you borrowed, you can then use the money again.
Most lenders encourage MSMEs to apply for business loan online, which is a quick and convenient process.
Also read: How Your Credit Score Impacts Car Loan Interest Rates
What is an Advance?
An advance is short-term financial assistance provided to enterprises to cover up-front expenses which is commonly provided by banks and NBFCs. Advances are usually adjusted against future earnings or payments. They are not always secured, but they can have fixed repayment terms.
What Are the Types of Advances?
- Cash Credit:MSMEs can withdraw cash from their account over and above their available balance, within a decided limit.
- Trade Credit:Suppliers enable business owners to purchase products or services on a credit basis and where they can settle later.
- Letter of Credit:A bank assures payment to a seller at the request of the buyer, reducing the risk of non-payment.
- Bank Overdraft:It is quite similar to cash credit, but typically connected to a current account.
- Advance Salary:Employers give employees part of their salary in advance, which is later deducted from their wages later.
Also read: How to Use a Small Business Loan to Grow and Scale Your Business
5 Key Differences Between Business Loans and Advances
| Feature | Business Loan | Advance |
| Purpose | Used for long-term business needs like expansion, buying equipment, or large expenses. | Used for short-term or urgent financial needs like working capital or paying employees. |
| Repayment Period | Fixed repayment period (months or years). | Usually repaid in a shorter period (weeks or months). |
| Security | Can be secured or unsecured. Some lenders offer collateral free business loans. | May or may not require security. |
| Application Process | Takes more time as it involves detailed checks and documentation. | Faster process with fewer formalities. |
| Flexibility | Fixed loan amount and repayment schedule. | More flexible and often linked to future earnings or payments. |
Conclusion
Both business loans and advances are utilized for different financial requirements. A business loan is best for long-term funding and to cover bulk expenditures, whereas an advance can be utilized for short-term needs. Before you could apply, evaluate your financial condition and repayment capacity.
NBFCs play a significant role in providing business loans and advances easily. They offer simple repayment options, faster sanctions, and even collateral-free business loans in some instances, becoming the preferred choice of numerous small and medium enterprises.
