What Is A Commercial Loan?

A commercial loan is a loan that is extended to businesses by a financial institution. Read to know more with IIFL Finance!

26 Dec,2022 12:22 IST 1693 Views
What Is A Commercial Loan?

Loans are taken for a myriad of reasons. It can be taken for buying a home or for expanding a business. Loans offered to individual consumers for their personal needs are consumer loans, whereas loans needed to keep afloat or grow business operations are commercial loans.

What separates a consumer loan from a commercial loan is the ambit of the loan. Consumer loans are made to individual persons and they are not meant for big purchases. Commercial loans are taken by business owners to fund far bigger expenses.

Due to a shortage of time, regulatory norms and upfront costs many small and mid-sized businesses may not always have to access to equity and bond markets for funds. Instead, they use debt products such as commercial loans or lines of credit. Typically, all commercial loans are used to address capital expenditures, acquire new machinery, cover operational costs, build infrastructure, etc. that the company may otherwise be unable to afford.

Who Offers Commercial Loans?

Going by the terms, both commercial and business loans are the same thing. However, the fine line of demarcation is that while business loans comprise smaller loan amounts, commercial loans are typically larger.

A large number of banks and non-banking finance companies provide commercial loans. Banks typically provide better interest rates and flexible repayment options than NBFCs on commercial loans to help businesses.

However, banks tend to be more selective as borrowers need to have a good credit rating, minimal annual revenue and must be in business for a minimum number of years. There are also many online lenders who can issue commercial loans. They have a faster approval process and less stringent borrowing requirements. Commercial loans can also be arranged from non-profit lenders or other microfinance organizations.

Advantages and Disadvantages Of Commercial Loans

A commercial loan is a great way to retain ownership of the business. Not only does it provide easy access to capital which can be used for any kind of commercial purposes, but it also is a great way to build a credit score that can be useful for funding options in the future.

But like business loans, a commercial loan application involves a good deal of paperwork. Also, there may be restrictions on its usage, meaning the funds obtained as loans must be utilized only for the purpose it is taken.

Types Of Commercial Loans

Here are a few types of commercial loans that companies can choose as per their needs:

• Construction Equipment Loan:

Businesses that require large and expensive construction equipment like cranes and excavators can use this loan to purchase the equipment. If the business owner defaults on the loan, the bank can seize the equipment.

• Term Loan:

In simple terms, it is a loan that needs to be paid back within a specified time frame. It comes with a fixed or variable interest rate and fewer restrictions on its end-usage. It can be both secured and unsecured, depending on the collateral.

• Commercial Vehicle Loan:

This type of loan helps to buy business vehicles. The purchased vehicles serve as the collateral for the loan. The repayment period of this loan ranges from one to five years.

• SME Credit Card:

This type of loan is offered to retail traders, tiny units, village industries, etc. for a period of three to five years. The loan is provided either in cash credit or term loans and there is no need for collateral in this loan.

• Bank Overdraft Facility:

This loan product helps to withdraw funds greater than are available in the company's current account. It is a form of extension of a stipulated limit that allows borrowers to withdraw from the account even when the balance is zero. It is a short-term loan in which the terms and conditions of the loans are decided before the sanction.

• Letter Of Credit:

It is a document from a financial institution guaranteeing a buyer's payment to a seller provided certain documents have been presented to the bank. So, if a buyer fails to make the payment, the concerned bank will pay the pending balance on the borrower's behalf. Banks collect a fee for issuing a letter of credit.

• Bank Guarantee:

In this type of loan the lender ensures that the liabilities of a debtor are met. This option is an excellent opportunity for young entrepreneurs as it helps a business to purchase goods and services that it would not otherwise be able to.

Conclusion

For borrowers with a clear vision of growing the business, a positive cash flow in the form of funds can keep the wheels of success rolling. A commercial loan can be used to purchase office equipment or for buying a space to fit in the extra inventory.

Like any other loans, the process to secure a commercial loan begins with a loan application process. Based on the requirement in business and also, individual repayment ability, one must identify how much to borrow and maintain an affordable monthly payment. It is likely for lenders to ask for a minimum annual revenue to qualify for a loan. To avoid any disappointment, it is good to check the eligibility criteria online.

At the same time, it is good to approach a reliable lender like IIFL Finance. Designed to empower small businesses, the loan products at IIFL come with flexible repayment options and affordable rates. To know more, simply log into the company’s website.

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