Types of Business Loan in India — Which One Actually Fits

Start with the question, not the product

Before comparing anything, answer one thing: when does this money come back to you?

• Within 90 days, and it will happen again next quarter — stock for a season, a payroll gap, a customer who pays at 60 days. You need revolving credit. Borrowing this on a three-year term loan means paying interest for two and a half years on money you no longer need.
• Over several years, from something you are buying — a machine, a second outlet, a fit-out. You need a term loan. Funding this on an overdraft means the limit is consumed permanently and unavailable when you actually have a cash crunch.
• It does not come back — it is a loss to absorb — a bad debt, a legal cost, a failed order. Borrowing is the expensive answer here. Consider it carefully before you take on an EMI against something that generates no return.

The eight products, compared

Revolving credit — you pay for what you use

An overdraft or cash credit facility gives you a limit rather than a lump sum. Draw ₹4 lakh of a ₹20 lakh limit and you pay interest on ₹4 lakh, for the days you hold it. Repay it and the limit refills.

For a business with an uneven cycle this is far cheaper than a term loan, even at a higher headline rate — because the rate applies to a much smaller average balance. A 16% overdraft used for eight days a month costs less than a 13% term loan running every day of the year.

The catch: the limit is reviewed annually and can be reduced, and it is easy to treat a permanently drawn overdraft as free money. If your balance never comes back to zero across a year, you are not using working capital — you are using an expensive term loan and should refinance it as one.

Term borrowing — a fixed sum, a fixed end

A term loan lands in your account as one amount and repays on a schedule. It suits anything where the spending happens once and the return arrives over years.

Machinery and equipment finance is a term loan with the asset as security, which is why it is usually cheaper than an unsecured facility of the same size and why lenders will fund 70% to 85% of the invoice value rather than the whole thing. You put in the margin, they fund the rest, and the machine is hypothecated until it is repaid.

Match the tenure to the working life of what you are buying. A seven-year loan on a machine that will be obsolete in four leaves you paying for something you have already replaced.

Invoice discounting — borrowing against money already earned

If you supply to large buyers on 60 or 90 day terms, your money is not missing — it is scheduled. Invoice discounting advances a portion of a confirmed invoice, typically 70% to 90%, and settles when the buyer pays.

This is the most under-used product on the list among Indian MSMEs, and it is often the right one. It is priced against your buyer's credit quality as much as your own, so a small supplier to a large well-rated company can borrow on better terms than its own balance sheet would justify. It is worth checking whether your buyers are registered on TReDS, the RBI-backed platform built exactly for this.

When security makes sense

Offering property against a business loan feels like a step down. Financially it usually is not. A loan against property is priced several percentage points below an unsecured business loan, runs for far longer, and is assessed largely on the asset — which means a thin ITR matters much less.

The real question is not cost, it is consequence. An unsecured loan that goes wrong is a credit problem. A secured loan that goes wrong is a property problem. Borrow secured for things that build the business, and think hard before securing property against a short-term cash gap.

If you own the premises you trade from, loan against property is worth pricing alongside anything on this page.

Two mistakes that cost the most

Financing recurring needs with term loans. A business that takes a fresh three-year loan every season ends up with four running at once, four EMIs, and no flexibility. One overdraft limit would have covered all four cycles at a fraction of the cost.

Buying assets on revolving credit. The overdraft funds the machine, the limit stays drawn, and the next genuine cash crunch arrives with nothing available. Then a second facility gets taken at a worse rate because the first one is fully used.

Frequently asked questions

Q1. What is the difference between a working capital loan and a term loan?
A working capital loan funds the operating cycle — stock, salaries, receivables — and is sized against how much money is tied up in that cycle. A term loan funds a specific purchase and repays over the life of what you bought. Using one for the other's job is the most common and most expensive mistake in business borrowing.

Q2. Which business loan has the lowest interest rate?
Secured products, because the lender has recourse. A loan against property is typically the cheapest, followed by machinery finance where the asset is hypothecated, then CGTMSE-backed MSME facilities, with unsecured loans the most expensive. But the lowest rate is not the lowest cost — an overdraft at a higher rate used for a few days a month can cost less in rupees than a cheaper loan running all year.

Q3. Can I get a business loan without collateral?
Yes. Unsecured business loans up to around ₹2 crore are available from banks and NBFCs against vintage, turnover and credit record. Under CGTMSE, facilities up to ₹5 crore can be guaranteed rather than secured, which is a different mechanism reaching a similar outcome.

Q4. What is cash credit, and how is it different from an overdraft?
Both are revolving limits. Cash credit is drawn against current assets — stock and receivables — with the limit set from a periodic stock statement, so it suits traders and manufacturers. An overdraft sits on a current account and may be secured by assets or nothing at all. In day-to-day use they behave the same way: interest on what you draw, for the days you draw it.

Q5. Which loan is best for buying machinery?
Machinery or equipment finance, because the machine secures the loan and brings the rate down. Lenders typically fund 70% to 85% of the invoice, so plan for the margin. Keep the tenure inside the working life of the equipment.

Q6. Can a new business get a loan?
Under two years of vintage, the mainstream unsecured market is largely closed. What remains is government-backed — PMEGP, Stand-Up India, Mudra for small amounts — or secured against property, or a smaller facility from an NBFC assessing on banking alone. These are covered on the startup and government schemes pages.

Q7. How long does each type take to disburse?
Invoice discounting is fastest, sometimes within 48 hours once the buyer is onboarded. Unsecured loans typically take 3 to 7 working days. Machinery finance follows the invoice and vendor verification. Secured loans and property-backed facilities take three to six weeks, because valuation and legal checks cannot be hurried.

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