Types of business loans in India, and which one fits each need

What is a business loan?

A business loan is money a lender gives a business for a business purpose, repaid with interest over an agreed tenor (the repayment period). The lender can be a bank, an NBFC (a non-banking financial company that lends but cannot take demand deposits) or, for small loans, a microfinance institution.

The types of business loans differ in three ways: what the money is for, how it is repaid, and what backs it. Get those three right and the rest, including the rate, follows. This guide covers each type in turn, then shows how to pick.

Types of business loans at a glance

Term loans

A term loan is a fixed amount paid out once, or in tranches, and repaid in equal monthly instalments (EMIs) over a set tenor. It suits anything that will earn over several years: a machine, a new shop, a factory extension.

Two points matter most. First, match the tenor to the life of the asset: a machine that works for seven years should not be funded by a two-year loan, or the EMI will squeeze your cash. Second, a term loan becomes a non-performing asset when interest or principal is overdue for more than 90 days (RBI Master Circular on asset classification), so plan the EMI against your slowest months, not your strongest.

Working capital loans: cash credit and overdraft

Working capital is the money tied up in running the business: stock on the shelf, invoices not yet paid, and bills to settle. A working capital loan funds that cycle.

• Cash credit is a limit against your stock and receivables. You draw what you need and pay interest only on what you use. The amount you can draw at any time is your drawing power, worked out from a current stock statement; banks expect that statement to be no older than three months (RBI Master Circular on asset classification).
• Overdraft lets your current account go below zero up to a limit. It suits short gaps.
• How big a limit? For micro and small borrowers with limits up to ₹5,00,00,000, banks commonly compute the working capital limit as at least 20% of projected annual turnover (PIB press release, 23-Jul-2019).

The working capital guide explains the cycle and the gap in detail, and the cash credit and overdraft page covers the products.

Business line of credit

A line of credit is a pre-set limit you can draw, repay and draw again. Interest runs only on the amount drawn. It suits a business with repeated short needs, such as paying suppliers before customers pay. See the business line of credit page.

Invoice discounting, TReDS and factoring

If your money is stuck in unpaid invoices, you can get most of it now instead of waiting.

• Invoice or bill discounting: a financier advances money against an invoice and collects from your buyer on the due date.
• TReDS (Trade Receivables Discounting System) is an RBI-authorised online platform where many financiers bid to discount invoices of MSMEs (RBI FAQ on TReDS). Only MSMEs can sell on it; buyers can be companies, government departments and PSUs (RBI FAQ on TReDS). Deals on TReDS are without recourse to the MSME: if the buyer defaults, the financier cannot come back to you (RBI FAQ on TReDS). Five platforms are authorised (RBI payment system operators list).
• CGTMSE cover on TReDS started on 15-Jun-2026 for invoices where both buyer and seller are micro or small enterprises, with 75% cover and a ceiling of ₹2,00,00,000 per seller (CGTMSE circular 262).

More detail: invoice discounting and factoring.

Machinery and equipment loans

A machinery loan funds a specific machine, which usually becomes the lender's security. The lender commonly asks you to fund part of the price yourself (the margin).

For larger purchases, the Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME) gives lenders a 60% guarantee from NCGTC on loans up to ₹1,00,00,00,000 for equipment and machinery. A March-2026 change brought service businesses in and set the machinery share at 60% of project cost (PIB press release, 21-Mar-2026). See machinery and equipment loans.

Loan against property

A loan against property (LAP) is a term loan or overdraft secured by residential or commercial property. Because the lender can recover from the property, LAP usually carries a lower rate and a longer tenor than unsecured loans. The trade-off is the valuation, the legal checks and the risk to the property. See secured vs unsecured.

Unsecured business loans

An unsecured business loan has no asset behind it. The lender relies on your bank statements, GST returns and credit record. It is quicker to arrange and costs more. As one published example, Lendingkart, an NBFC, offers unsecured loans up to ₹50,00,000 from 17.25% a year over one to three years (Lendingkart).

For micro and small enterprises, banks must not take collateral on loans up to ₹20,00,000 sanctioned or renewed from 01-Apr-2026 (RBI notification, 09-Feb-2026). So a small, well-documented business may get a collateral-free bank loan at a bank rate rather than an unsecured loan at a higher one. See unsecured business loans.

Government scheme loans

Government schemes do not lend directly. They work through banks and NBFCs, either by refinancing them, guaranteeing their loans or adding a subsidy.

Check each scheme's current status on its official portal before you plan around it. See government loan schemes.

Trade finance: letters of credit and bank guarantees

Some business needs are not loans in the usual sense. A letter of credit is a bank's promise to pay your supplier when agreed documents are presented. A bank guarantee is a bank's promise to pay a third party if you fail to perform, often needed for tenders and contracts. Both use your credit limit without paying out cash on day one. See trade finance.

Which type fits which need

Who lends most also changes with size. Public sector banks lead below ₹10,00,000 of exposure, NBFCs scale the ₹10,00,000 to ₹2,00,00,000 band, and private banks dominate above that (SIDBI). Compare offers on the APR shown in each lender's Key Facts Statement (RBI notification, 15-Apr-2024). The how to choose a business loan guide lists the criteria.

Before you apply, check how a lender is likely to read your file with the free loan readiness check. Capnix is not a lender; it takes your loan requirement to lenders on its lender panel, and the lender decides.