Commercial Loans: Overview
Commercial loans or business loans are sought-after means of accessing credit by businesses. While both are otherwise similar, commercial loans generally have a larger credit size than business loans. The market for commercial loans is growing at a very fast pace.
There are various reasons for this, including an improving economy, increased employment, and increased demand for small and medium-sized firms. As a result of the increased demand, lenders have scaled up their lending appetite and increased the number of financing choices available.
What is a Commercial Loan?
A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures and/or cover operating costs that the business may otherwise be unable to afford. Expensive upfront costs and regulatory hurdles often prevent small businesses from having direct access to bond and equity markets for financing. That is why smaller businesses have to rely on other lending products, such as lines of credit, unsecured loans or term loans.
What is Commercial Lending in Banking and Why is it Required?
Commercial lending generally serves the funding needs of businesses with varied legal statuses viz. Proprietor Firm, Partnership, LLP or a Company. A commercial loan can help you get the necessary equipment, whether heavy machinery or office PCs. Furthermore, the lender can hold the bought equipment as collateral without requesting additional security.
Companies with a solid market position can now progress to the next stage: business expansion. For business expansion, companies will require funding, and commercial loans can help them. Business owners can also consider expanding into a new target market or geographic area.
Substantial working capital is the foundation of any successful organisation, whether micro, small, medium or large. Companies with difficulty maintaining working capital can opt for a commercial loan to offset the negative financial consequences.
Small businesses might not have the necessary credit profile. Thus, they may have a difficult time obtaining substantial loans from the banking sector. Therefore, to build a good credit profile, they opt for small commercial loans.
Types of Commercial Loans
There are numerous types of commercial loans available to companies; some of them include the following.
Bank Overdraft Facility
If a company needs immediate cash to make a payment but does not have the required amount in the bank account, it can opt for a bank overdraft facility. These loans enable firms to withdraw cash over what is available in their current account. The most significant advantages of bank overdrafts are cheaper interest rates and less documentation.
Term Loans
As the name implies, term loans are issued for a set period during which the borrower must return the loan plus interest. Further, it can be divided into secured (with collateral) and unsecured loans. The interest rate offered on secured loans is less than on unsecured loans because of the collateral.
According to terms, it can be categorised into short-term loans (less than 12 months), medium-term loans (12–36 months) and long-term loans (more than 36 months).
Letter of Credit
A letter of credit is a document issued by a financial organisation to the customer’s supplier to guarantee that the customer can make the payment on time for the goods provided. The lender pays the total or remaining sum on the borrower’s behalf if the buyer fails to make the payment. It is commonly used in import–export transactions.
SME Collateral-free Loans
In an SME collateral-free loan, the lender does not require any personal guarantee or collateral to provide a loan; the loan amount and interest rate are based on the borrower’s profile, including age, income, credit score, etc.
Commercial Mortgage (Commercial Property Loan)
What is Commercial Property Loan?
Commercial mortgages, often known as business mortgages, allow business owners to borrow funds to purchase commercial real estate or land for their company. The property itself secures the loan.
What is Commercial Lending Process?
Lending institutions give out commercial loans to help businesses fulfill short-term capital needs, such as working capital needs, operations costs and equipment purchases. Commercial financing functions similarly to typical business loans in the majority of cases. It indicates that the borrower must pay back the loan amount plus interest within a set period. Lenders usually have a set of criteria and terms and conditions in place for these types of loans.
Eligibility for Commercial Loans
For issuing commercial loans, various commercial lending organisations have varying standards. In India, single proprietors, self-employed professionals, partnership firms, private limited corporations and public limited companies can apply for commercial loans. Borrowers must be Indian citizens who are between 21 and 65 years of age.
Businesses must have a continuous revenue stream and a high annual turnover and must meet the minimum yearly income criterion. Moreover, the business must have been in existence for at least a year.
Documents Required for Commercial Loans
When applying for a commercial loan, a company must provide specific documentation to the lender. Depending on the lender, the documentation may vary.
However, the basic documents required are companies/individuals’ GST or VAT statements for a certain period or PAN card, proof of continuation in business, a duly filled application form and company financial statements for a certain period.
How to Apply for Commercial Loans?
Obtaining a loan has been quite simple and quick in recent years. The money will be credited to your account within a few days if you submit the paperwork and meet the eligibility requirements. For a loan, both online and offline applications are acceptable.
Online Method: In the online method, visit the lender’s website, click on apply now, fill in the required details, and the lender will get in touch with you.
Offline Method: In the offline mode, visit the lender with the required documents, and the lender will verify the documents and will ask you to fill out a form. Once verified, the loan amount will be transferred in a couple of days.
Conclusion
Before opting for commercial loans, you must consider elements such as interest rate, credit score and other applicable fees. By examining these criteria, one can determine whatever works for them. It also prevents consumers from making poor judgments, such as selecting an unsuitable lender, selecting an inconvenient term or borrowing more than they require. Further, when they miss a payment, their credit rating suffers. Check your eligibility for Tata Capital Loans and apply to meet your funding requirements.
FAQs
Q1. Is part payment allowed in commercial loans?
Some lenders allow part payment, but there could be restrictions on how many times you can part pay and the maximum amount you can repay. Further, there could be some fees as well. Thus, you need to examine this with the lender.
Q2. Who is eligible for commercial loans?
In India, single proprietors, self-employed professionals, partnership firms, private limited corporations and public limited companies can apply for commercial loans. Further, borrowers must be Indian citizens who are between 21 and 65 years of age.
Q3. What are the advantages of a commercial loan?
Lending institutions provide commercial loans to firms to assist them in meeting short-term capital requirements such as working capital, operational costs, and equipment purchases or expansion. Getting a commercial loan is hassle-free with reasonable interest rates, flexibility of usage, quick disbursal and an improved credit report.
15 September 2023
7 mins read
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