Understanding the different types of business loans in India is essential for entrepreneurs, MSMEs, startups, and corporates to choose the right funding structure. Each loan type serves a specific purpose—from long-term expansion to short-term liquidity management.
Below are the 8 Different Types of Business Loans in India, widely offered by banks and NBFCs, each explained with use cases and suitability.
1. Term Loans (Term Loan India)
A term loan is one of the most common business loan types used for long-term investments. These loans provide structured financing with predictable monthly payments, making them ideal for businesses planning major capital expenditures.
Key Features
- Fixed loan amount with clearly defined terms
- Defined tenure (1–10 years)
- Monthly EMIs calculated through transparent formulas
- Can be secured or unsecured based on business eligibility
Best Used For
- Purchasing land or commercial property investments
- Buying heavy machinery and production equipment
- Business expansion or diversification strategies
- Technology upgrades and infrastructure
Term loans are ideal for businesses with predictable cash flows and long-term capital needs.
2. Working Capital Loans (Working Capital Loans India)
Working capital loans are designed to support day-to-day business operations and manage seasonal fluctuations. This type of financing ensures your business never runs out of operational funds during critical periods.
Key Features
- Short- to medium-term funding (3-36 months)
- Can be structured as OD or CC facility
- Interest charged only on utilized amount
- Quick approval process for established MSMEs
Best Used For
- Inventory purchase and stock management
- Salary and vendor payments without delays
- Managing seasonal cash flow gaps in trading
- Bridging payment cycles between receivables and payables
This is one of the most critical business financing options in India for SMEs and traders who need flexible access to operational capital.
3. Equipment Finance / Machinery Loans (Equipment Finance Loans India)
Equipment finance loans are specifically offered for purchasing or upgrading business equipment. The Reserve Bank of India regulates these loans to ensure fair lending practices across financial institutions.
Key Features
- Asset itself acts as collateral (lower risk)
- Lower interest rates compared to unsecured loans
- Structured repayment aligned with asset life
- Tax benefits on depreciation available
Best Used For
- Manufacturing machinery and production lines
- Medical or construction equipment purchases
- Technology upgrades for digital transformation
- Replacing outdated equipment to improve efficiency
These loans help preserve working capital while enabling productivity growth through modern equipment acquisition.
4. Business Loan Against Property (LAP) (Loans Against Property India)
A business loan against property (LAP) allows businesses to raise large funds by mortgaging property. This is one of the most cost-effective financing options for established businesses.
Key Features
- Secured loan with property collateral
- Lower interest rates (typically 9-11% p.a.)
- Higher loan amounts (up to ₹5-10 crore)
- Longer tenure (up to 15 years)
- Flexible end-use of funds
Best Used For
- Business expansion projects
- Debt consolidation at lower rates
- Large capital investments and acquisitions
- Opening new branches or manufacturing units
LAP is among the most cost-effective business loan options in India for established businesses with owned property.
5. Invoice Discounting / Factoring
Invoice discounting enables businesses to unlock cash tied up in unpaid invoices. Banks like HDFC and NBFCs actively offer this facility to B2B enterprises.
Key Features
- Borrowing against receivables (70-90% advance)
- Improves cash flow without creating new debt
- Short-term financing (30-120 days)
- Minimal documentation required
Best Used For
- B2B businesses with corporate clients
- Companies with long receivable cycles (60-90 days)
- Managing working capital stress efficiently
- Avoiding delays in supplier payments
This option is increasingly popular among MSMEs dealing with large corporate clients who have extended payment terms.
6. Overdraft Facility / Cash Credit (Cash Credit Loans India)
An overdraft facility or cash credit loan offers flexible access to funds based on your business’s financial strength and banking relationship.
Key Features
- Pre-approved credit limit based on turnover and banking history
- Interest charged only on used amount
- Revolving credit structure for ongoing needs
- Linked to current account for easy access
Best Used For
- Managing fluctuating cash requirements seasonally
- Emergency liquidity needs during market volatility
- Short-term operational expenses without formal loans
- Bridging temporary revenue shortfalls
This remains one of the most flexible business loans types in India, especially for trading and manufacturing businesses with variable cash flows.
7. Merchant Cash Advance (POS Loans)
A merchant cash advance, also known as a POS loan, is provided against future card sales. This innovative financing is ideal for retail businesses with consistent digital payment volumes.
Key Features
- Repayment linked to daily card transactions (automatic)
- Faster approval (often within 24-48 hours)
- Minimal documentation (primarily bank statements)
- No fixed EMI burden
Best Used For
- Retail stores with high footfall
- Restaurants and hospitality businesses
- High POS transaction businesses (₹2 lakh+ monthly)
- Quick inventory restocking needs
These loans are suitable for businesses with strong digital payment volumes as tracked by payment processors and banks.
8. Government-Backed Business Loans (Government Business Loans India)
The Indian government offers several government business loans to support MSMEs and startups through various ministries and departments.
Popular Schemes
- PM Mudra Yojana (PMMY) – up to ₹10 lakh
- PMEGP – for new manufacturing/service enterprises
- CGTMSE-backed loans – collateral-free financing
- Standup India – for SC/ST/Women entrepreneurs
Best Used For
- Small businesses and first-time entrepreneurs
- Startups and micro enterprises
- Women entrepreneurs seeking collateral-free loans
- Rural and semi-urban business development
These schemes provide easier access to credit with favorable terms backed by Government of India’s MSME Ministry.
Comparison of Different Types of Business Loans in India
| Loan Type | Ideal For | Security | Tenure |
|---|---|---|---|
| Term Loan | Expansion & assets | Optional | Long |
| Working Capital | Daily operations | Optional | Short |
| Equipment Finance | Machinery purchase | Equipment | Medium |
| LAP | Large funding needs | Property | Long |
| Invoice Discounting | Cash flow | Invoices | Short |
| OD / Cash Credit | Liquidity | Optional | Revolving |
| Merchant Cash Advance | Retail businesses | Sales | Short |
| Government Loans | MSMEs & startups | Limited | Medium |
How to Choose the Right Business Loan Type
Choosing among the types of business loans in India depends on several critical factors:
- Business stage and annual turnover documentation
- Cash flow stability and credit score
- Purpose of funding (expansion, working capital, or asset purchase)
- Collateral availability and property valuation
- Interest rate comparison across banks and NBFCs
A properly structured loan improves approval chances and long-term financial health. Consider consulting loan advisors who can help compare offers from 50+ lenders.
Final Thoughts
India offers multiple business loan options catering to different funding needs. Understanding these 8 different types of business loans in India helps business owners make informed financing decisions that support sustainable growth.
Whether you need working capital for daily operations, term loans for expansion, or government-backed schemes for startups, there’s a suitable financing option available.
Need help selecting the right business loan? Consult a professional loan advisor at CreditCares to compare lenders and structure the best funding solution for your business. Check your loan eligibility and use our EMI calculator to plan your finances better.
Frequently Asked Questions – Types of Business Loans in India
1. Which type of business loan is best for startups in India?
For startups, government-backed loans (like PM Mudra Yojana and CGTMSE) and working capital loans are the most suitable. These options offer easier eligibility, lower collateral requirements, and flexible repayment structures for early-stage businesses.
Check your startup loan eligibility here →
2. What is the difference between a term loan and a working capital loan?
A term loan is used for long-term investments such as machinery or property, with fixed EMIs over a defined tenure. A working capital loan is meant for day-to-day operational needs like inventory, salaries, and vendor payments, usually with shorter tenures or revolving limits.
Compare both loan types with our EMI Calculator →
3. Can I get a business loan without collateral in India?
Yes, many banks and NBFCs offer unsecured business loans without collateral, especially for MSMEs with strong turnover and credit history. Government schemes like CGTMSE also support collateral-free business financing backed by Reserve Bank of India guidelines.
Check your CIBIL score for free before applying →
4. Which business loan has the lowest interest rate?
Loans Against Property (LAP) and equipment finance loans generally offer the lowest interest rates because they are secured loans. Interest rates depend on the borrower’s profile, collateral value, and lender policies.
Typical LAP rates: 9-11% p.a. (as per RBI guidelines)
Compare LAP rates from top banks →
5. What are cash credit and overdraft facilities used for?
Cash credit and overdraft facilities are used to manage short-term liquidity needs. They allow businesses to withdraw funds up to a sanctioned limit and pay interest only on the amount utilised, making them ideal for fluctuating cash flows.
Learn how to apply for overdraft facility →
6. Is invoice discounting better than a working capital loan?
Invoice discounting is suitable for businesses with large unpaid receivables, as it unlocks cash without adding long-term debt. Working capital loans are better for ongoing operational expenses where receivables may not be immediately available.
Best for B2B companies: Invoice discounting
Best for daily operations: Working capital loan
Download your company’s credit report to check eligibility →
7. How do I choose the right business loan type?
Choosing the right business loan depends on:
- Purpose of funding – expansion, working capital, or asset purchase
- Business turnover and vintage – download balance sheet from income tax portal
- Cash flow stability – check your banking history
- Availability of collateral – property valuation for LAP
A properly structured loan improves approval chances and reduces borrowing costs.
Get personalized loan recommendations →
🎯 Confused About Which Business Loan to Choose?
Every business has different funding needs. Choosing the wrong loan type can increase interest costs or affect cash flow.
Get Expert Guidance to:
✅ Compare 50+ banks and NBFCs for best rates
✅ Identify the best business loan option for your industry
✅ Improve eligibility before applying with proper documentation
✅ Avoid multiple rejections and CIBIL hits
✅ Get faster approvals with expert assistance
💼 Apply for Business Loan – Expert Assistance
Whether you need a term loan, working capital, LAP, or government-backed business loan, our experts help you structure the right funding solution for faster approval.
📞 Talk to a Business Loan Expert Today
👉 Get Free Loan Consultation →
👉 Calculate Your EMI in 30 Seconds →
👉 Check Loan Eligibility Instantly →
👉 Download Required Documents Guide →
📚 Related Resources
- Check Your Credit Score for Free – Know your CIBIL before applying
- Download Your Company’s CCR Report – Business credit assessment
- How to Download Balance Sheet from Income Tax Portal – Step-by-step guide
- SBI vs HDFC Home Loan Comparison – Best rates comparison
- Become a Loan DSA Partner – Earn with CreditCares
🏦 Popular Bank Business Loan Resources
- HDFC Bank SME Working Capital
- RBI Guidelines on Business Loans
- Government MSME Credit Guarantee Scheme
- PM Mudra Yojana Official Portal
💡 Pro Tip: Always check your credit score and download your bank statements before applying to improve approval chances!
