What is a composite loan for business? Know types, interest rates and other key details

Business owners regularly need capital to expand their operations. With the growth of a business, financial needs become more complex due to the requirement of large funds for multiple purposes like to cover day-to-day expenses, operational costs, new product launches, technology upgradation and investment in critical infrastructure, among others. While arranging funding may not be a problem for big companies, small business owners and traders often find it difficult to garner funds. In such cases, loans from banks could be a viable option.

Many banks and Non-Banking Financial Companies (NBFCs) these days are providing composite loans for businesses to meet the various needs of entrepreneurs. Business owners can use composite loans for multiple purposes through a single borrowing and repay the loan without dealing with multiple credit instruments.

Let’s take a look at the key aspects of a composite loan for business.

What are composite loans?

As the name suggests, composite loans are a combination of multiple credit facilities. A composite loan for business could be a combination of a term loan, working capital funding and revolving credit. These loans are aimed to meet the fixed capital investments and working capital requirements of business owners. A composite loan could be a combination of short-term and long-term loans.

What is the purpose of composite loans?

One of the main reasons many companies opt for composite loans is their flexibility. It allows businesses to customise interest rates and repayment plans as per their needs.

Composite loans can be tailored to align with a company’s cash flow and risk profile, potentially reducing overall borrowing costs. They also improve liquidity, allowing businesses to access funds more easily for growth and expansion.

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ALSO READ: How to Secure the Best Business Loan Interest Rate

Types of composite loans for business

1. Term loan and working capital loan 

This is one of the most popular types of composite loans, in which a company combines a working capital loan (to cover day-to-day expenses) with a term loan (for long-term expenditures like expansion, infrastructure, or machinery). This structure enables businesses to meet both long-term growth and short-term liquidity requirements through a single borrowing.

2. Project financing composite loan

Businesses, working on large-scale projects, often look for this type of composite loan. Combining debt and equity financing, the loan is designed to fund a particular project, like establishing new infrastructure or factories. The project’s cash flows are used to pay back the loan.

3. Overdraft and term loan combined

A business can combine an overdraft facility for flexible, short-term cash flow needs and a term loan for asset purchases or long-term investments. This gives companies access to both short-term loans for working capital and long-term funding for their capital expenditures.

4. A combination of revolving credit and term loan

This structure combines a term loan with a revolving credit facility, which allows the business to borrow money, pay it back, and then borrow it again up to a certain amount. It could be suitable for businesses that require stability for long-term growth as well as flexibility in managing cash flows.

5. Cash credit and term loan  

When a business requires more significant, long-term funding, it may choose to combine a term loan with a cash credit facility, which offers working capital on a revolving basis. This type of loan is common for organisations that require continuous working capital as well as funding for expansion or asset purchases.

6. Syndicated composite loan

This type of syndicated loan includes both short-term and long-term loans, often with varying interest rates and repayment terms. However, all these components are combined into a single loan agreement for the company.

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Who offers composite business loans in India?

Leading lenders, like the State Bank of India, ICICI Bank, Bank of Baroda, Bank of Maharastra are offering composite business loans to cater to various financial needs of customers.

Interest Rates on Composite Loan

Several factors, including the loan type, lender, business financial condition, and loan amount, can affect the interest rate on composite loans in India.

When it comes to term loans, interest rates typically range from 8% to 14% per annum, depending on the lender and the business’s creditworthiness.

However, the interest rate for working capital loans ranges from 9% to 16% per annum, while revolving credit facilities typically have interest rates between 10% and 18%, depending on the lender and the financial stability of the business.

How to get the best interest rate?

A strong credit score of the business owner, at least above 700, is a must to get a lower interest rate. A business owner may be able to get a lower interest rate on a composite loan with a healthy credit history and strong financials of the existing venture.

Short-term composite loans may have slightly higher interest rates than long-term loans due to the risk and quicker repayment cycles. Longer-term loans may offer lower interest rates, but they may incur additional charges for long-term servicing.

Public sector banks typically offer lower interest rates on loans, ranging from 8% to 12%, due to government backing and more favourable lending policies. On the other hand, private sector banks and NBFCs may offer slightly higher interest rates, typically ranging from 10% to 18% per annum.

Conclusion

To sum up, availing a composite loan for a business can help in growth and expansion. You just need to choose the right kind of credit facilities as per the needs of your business venture. A comparison and thorough review of different credit combinations, interest rates and repayment plans can help in securing the most suitable composite loan for business.

Moneycontrol has teamed up with eight lenders to offer fast, fully digital loans up to Rs 50 Lakhs. The application process is easy to follow: enter your details, complete the KYC verification, and choose an EMI plan. Interest rates start as low as 10.5% per year.

Summary

Composite business loan offer funding for fixed capital investment and/or working capital requirement. Learn more about how they work and how to avail them.

Disclaimer

This piece/article was written by an external partner and does not reflect the work of Moneycontrol’s editorial team. It may include references to products and services offered by Moneycontrol.