Once a startup or small business finds its footing in the market and generates expected revenue, the ideal next step is to expand. Business expansion can mean hiring more people, buying more equipment, opening a new branch, or venturing into a new market. While many funding options are available in the market for business expansion, assessing the best option for your business needs can take time. This blog discusses the top 6 loans for business expansion in India and shares their advantages and disadvantages. Read along!
Top 6 Business Expansion loans in India
Revenue-based Financing
Revenue-based financing is the type of funding that lets founders raise funds without diluting equity, where the repayments happen as a percentage of monthly revenue. This ensures that your business always has sufficient capital to take care of inventory and marketing needs. The maturity period of revenue-based loans is a function of your actual revenue trajectory, typically modeled for less than six months. If you are an online business with at least 6-12 months of revenue history and healthy gross margins, revenue based financing is the best growth capital option for your next leap.
Pros
- No equity dilution needed
- Repayments are based on the performance of your business
- Easy loan disbursement
Cons
- Needs a minimum revenue history of 6-12 months
- Available mostly only for online businesses
- Cannot be used to fund capital expenditures and long-term projects
Term Loan
Term loans are one of the most widely availed loans for business expansion in India. As the name suggests, term loans are the type of loans where the capital is provided upfront by the lender and repaid along with interest over a period of time by businesses. They can broadly be classified into short-term loans and long-term loans. While the former is usually availed for a period of one year or less, the latter can be availed for up to 10 years. The eligibility for term loans varies from lender to lender and depends on factors like the total amount, the period, etc. Term loans are a great funding option if you’re looking to open a new branch or invest in your marketing and sales efforts.
Pros
- Term loans have a predictable payment schedule
- They have a potential for early repayment
- Term loans, specifically long-term loans, have lower interest rates
Cons
- Term loans are usually set in stone, so they tend to be inflexible
- They have strict eligibility requirements, all of which must be met
- Term loans can have a more extended approval and disbursement period
Equipment Financing
A business expansion could also mean purchasing more equipment that helps increase the production of your products. The best loan for this need would be equipment financing. They let you purchase the necessary equipment for your business and enjoy tax benefits. This loan is predominantly availed by construction companies, farming businesses, auto-body shops, shipping companies, and restaurants.
Pros
- Businesses completely own the equipment after the loan is repaid. It is then considered an asset
- Equipment financing comes with significant tax benefits
- You don’t need to show any collateral to avail of equipment financing
Cons
- The equipment depreciates and goes obsolete quickly, which can be a negative
- Businesses can use the loan only to purchase equipment, not for other routine expenses
- The equipment cost is more expensive due to the added interest
Merchant Cash Advance
In simple terms, a Merchant Cash Advance is an arrangement where the lender provides capital in exchange for a portion of future card sales. Usually given for a period of 6-12 months, MCA is generally the last resort for businesses due to the hefty interest rates. If a business cannot avail of any other business loan, it can leverage the merchant cash advance.
Pros
- Merchant cash advance approval and disbursal process is quick
- The business has to pay only as per the daily sales
- A merchant cash advance allows you to have multiple funding streams
Cons
- Cash sales are ignored as the card sales decide the quantum
- A merchant cash advance is one of the most expensive business loans, with annual percentage rates (APRs) as high as 350%
- Lenders, in this case, majorly operate in an unregulated industry
Line of Credit
A business line of credit is primarily similar to a business credit card: you receive a maximum balance and take money from that balance as you need it. Each month, you make a minimum payment based on the loan’s current balance. Business lines of credit can be broadly classified into revolving and non-revolving. A revolving line of credit is one where the amount goes back to the original limit after repayment. On the other hand, a non-revolving line of credit is one where the borrowers use the available amount over a fixed period of time.
Pros
- Businesses have to pay for only the capital they utilize
- They offer flexible payment options along with flexible use of funds
Cons
- Line of credit comes at high-interest rates
- The loan limit for lines of credit can be lesser than what you would get in a traditional loan
Invoice Financing
Invoice financing is the type of business expansion loan where the funds are sanctioned against invoices submitted by the business to the lender. The lender can finance up to 80% of the invoice amount. This type of business loan is highly beneficial to businesses that face challenges due to the gap between raising the invoice and getting the payment.
Pros
- Invoice financing facilitates the liquidation of stuck cash
- It is confidential, i.e., the suppliers wouldn’t know about it
- It doesn’t require pledging of collateral
Cons
- Invoice financing offerings are highly subjective. Typically lenders do not offer the scheme against commercial invoices
- Some invoice financing companies charge exorbitant fees
- Invoice financing has a stigma attached to it, often perceived negatively
Remember, while applying for a business expansion loan might be tempting, the first step to even making the decision is to assess if you are ready for an expansion. Typically, businesses expand when they see a staff shortage, acquisition opportunity, or wish to conquer a new market. If you believe your business has reached that stage, then the next step is to evaluate your options (We recommend bookmarking this page). However, remember that when it comes to business loans, more often than not, you end up paying interest rates for years together.
At Velocity, we recommend going for revenue-based financing if you want a flexible, highly scalable, 100% digital fundraising process. This founder-friendly approach lets founders raise funds without diluting equity or providing collateral, and the repayments happen as a percentage of monthly revenue. You can apply at Velocity for revenue based funding for up to 4 Crores and get fair, flexible, and fast funds to grow your business! Click this link to explore revenue-based finance and uncover the potential benefits Velocity’s financial solutions for your company.
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