What is a Commercial Loan? A Comprehensive Guide

In the context of business financing, a commercial loan is frequently an essential choice. This tutorial will explain What is a Commercial Loan, how it functions, and the essential information you need to make a wise choice.

Commercial Loan | Overview

A commercial loan is a financing agreement based on debt that is made between a company and a bank or other financial institution. Usually, it is utilised to pay for significant capital projects and/or operational expenses that the company might not otherwise be able to afford. Small businesses are frequently unable to obtain financing directly from the bond and equity markets due to high upfront costs and regulatory obstacles. Smaller companies are therefore forced to depend on alternative lending options like term loans, unsecured loans, and credit lines.

Who Offers Commercial Loans?

By definition, a business loan is the same as a commercial loan. The fine line between business and commercial loans is that the former often have larger loan amounts, while the latter typically have smaller loan amounts.

Commercial loans are offered by a multitude of banks and non-banking finance companies. When it comes to business loans, banks usually offer more flexible repayment plans and lower interest rates than NBFCs.

Because borrowers must meet certain requirements, such as having a minimum annual revenue, a good credit rating, and having been in business for a certain number of years, banks are typically more picky. Additionally, there are a lot of online lenders offering business loans. They have less onerous borrowing requirements and a quicker approval process. Other microfinance institutions or non-profit lenders may also be able to arrange commercial loans.

Types of Commercial Loans

  • Construction Equipment Loan: Companies that need to buy big, pricey construction equipment, like excavators and cranes, can use this loan to do so. The bank may take possession of the equipment if the business owner fails to make loan payments.
  • Term Loan: It is, in essence, a loan that must be repaid within a predetermined window of time. It has fewer limitations on its final use and a fixed or variable interest rate. It depends on the collateral to determine whether it is secured or unsecured.
  • Commercial Vehicle Loan: The purchase of company cars is aided by this kind of loan. The vehicles that have been purchased act as collateral for the loan. This loan has a one-to-five-year repayment period.
  • SME Credit Card: For a duration of three to five years, retail traders, small businesses, village industries, etc. are eligible to apply for this kind of loan. Collateral is not required for this loan, which is offered as either a term loan or a cash credit.
  • Bank Overdraft Facility: This loan option facilitates the withdrawal of larger amounts of money than what is available in the business’s current account. It’s a way of extending a set limit that lets users take money out of the account even when there’s nothing in it. It’s a short-term loan where the terms and conditions are decided upon before approval.
  • Letter Of Credit: It is a financial institution that guarantees that, upon presentation of specific documentation to the bank, a buyer will pay a seller. Therefore, if a buyer defaults, the relevant bank will settle the outstanding balance on the borrower’s behalf. The cost of issuing a letter of credit is collected by banks.

Eligibility for Commercial Loans

Different commercial lending organisations have different requirements when it comes to lending money. Commercial loans are available in India to partnership firms, public limited companies, single proprietors, and self-employed professionals. The borrower must be a citizen of India and be between the ages of 21 and 65.

Businesses need to meet the minimum annual income requirement, have a steady stream of income, and have a high yearly turnover. In addition, the company has to have been around for a minimum of a year.

How to Apply for Commercial Loans?

In recent years, getting a loan has been relatively easy and quick. If you file the necessary documentation and satisfy the eligibility requirements, the funds will be credited to your account in a matter of days. Applications submitted offline or online are both accepted for a loan.

  • Online Method: Using the online approach, go to the lender’s website, select “apply now,” provide the necessary information, and the lender will contact you.
  • Offline Method: When you visit the lender in offline mode with the necessary paperwork, the lender will check it and ask you to complete a form. The loan amount will be transferred in a few days after it has been verified.

FAQ’S of What is a Commercial Loan?

Q1. Can I make a partial payment on a commercial loan?

Ans. While some lenders accept partial payments, there may be limitations on the total amount you can repay as well as the number of times you can make partial payments. Additionally, there might be additional costs. You must therefore discuss this with the lender.

Q2. What benefits can a business loan offer?

Ans. Commercial loans are given by lending organisations to businesses to help them cover short-term capital needs like working capital, operating expenses, and equipment expansion or purchase. Obtaining a business loan is simple and comes with benefits like a better credit report, flexible usage options, fast disbursement, and affordable interest rates.

Q3. For whom are commercial loans available?

Ans. Commercial loans are available in India to partnership firms, public limited companies, single proprietors, and self-employed professionals. Additionally, borrowers have to be citizens of India and be between the ages of 21 and 65.

Read more

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top