Commercial Loans: Eligibility, Types, Benefits, Working And Application Process

Business and commercial loans are two popular ways for business establishments to access credit. Although the terms can be interchanged, commercial loans have a greater credit limit than business loans. The retail loan market is more significant than ever before. From FY17 to FY21, the overall portfolio value of commercial loans saw a 93% increase.

There are many reasons, such as an improving economy, higher employment, and increased demand from small and medium-sized businesses. Lenders have expanded their offerings and made more financing options available to meet the increasing demand.

What is a Commercial Loan?

A commercial loan is a short-term loan that can increase the company’s working capital or pay significant operational and other expenses. This type of financing is used by small businesses when they need funds and cannot raise money through the bond or stock markets.

Banks (or a group of banks) can approve commercial loans based on the debtor’s credit score and financial records.

Why would you need commercial loans?

These are just some of the reasons a company might need funds:

  • Commercial loans can get equipment, heavy machinery, or office computers. The lender can also use the equipment purchased as collateral without additional security.
  • Businesses with solid market positions can move on to the next stage, business expansion. Commercial loan are available to help companies expand their business. A business owner may also want to expand into new markets or areas.
  • Solid working capital is essential for any organization. Companies with difficulty managing their working capital may be eligible for a commercial loan to offset negative financial consequences.
  • Small businesses may not have the required credit profile. They may need help to obtain large loans from the banking sector. They choose to take out small commercial loans to improve their credit score.

Types Of Commercial Loans

Companies have many options for commercial loan. Here are some:

Bank overdraft facility bank overdraft is a facility that allows companies to access cash immediately to pay a bill. These loans enable firms to withdraw some money beyond their bank account. Bank overdrafts offer significant benefits, including lower interest rates and lower documentation.

Term loans

As the name suggests, term loans are given for a specific period during which the borrower must repay the loan plus interest. It can also be split into secured (with collateral) and unsecured loans. Because of the collateral, the interest rate on fast loans is lower than that on unsecured loans.

It can be classified according to terms

  • Short-term loans (less than 12 months)
  • Loans for medium-term (12 to 36-month periods)
  • Lenders who offer long-term loans for more than 36 months

Letter of credit

letter of credit is a document that a financial institution issues to a customer’s supplier to ensure that the customer can pay the invoice on the due date. If the buyer pays the amount owing, the lender will pay the remaining amount.

It is used most often in import-export transactions.

SME collateral-free loans

SME collateral-free loans do not require collateral or personal guarantees. It includes income, credit scores, age, and other factors.

Commercial Mortgage

Business mortgages are also known as commercial mortgages. They allow business owners to borrow money to buy land or commercial real estate for their businesses. The property secures the loan.

How do Commercial Loans work?

Lending institutions offer commercial loans to assist businesses with short-term capital requirements, such as equipment and operating costs.

In most cases, commercial financing works similarly to traditional business loans. The borrower must repay the loan amount and interest within a specified period. These types of loans are usually subject to strict criteria and terms.

Benefits and Features of Commercial Loans

Here are some features of commercial loans:

  • There are three types of commercial loans:
  • Short-term loans (less than 12 months)
  • Loans for medium-term (12 to 36-month terms)
  • Lenders who offer long-term loans for more than 36 months
  • It can be broken down into secured (collateral required) and unsecured loans. Secured loans have a lower interest rate than unsecured loans due to the collateral.
  • Commercial loans are not available to individuals; they are offered to businesses.
  • Fixed or floating interest rates are available for commercial loans. Fixed interest rates will be maintained for the entire term if companies use them. However, if the interest rate fluctuates, it will remain fixed throughout the tenure.
  • Lending institutions offer commercial loans to help companies meet short-term capital needs such as working capital, operational expenses, equipment purchases, or expansion.
  • A commercial loan can be easily obtained with low-interest rates, flexible usage, quick disbursal, and a better credit score.

Eligibility to Commercial Loans

Different commercial lending agencies have different standards for issuing commercial loans. These are the main parameters:

  • Single proprietors, self-employed professionals, partnership firms, and limited private corporations can all apply for commercial loans in India.
  • Borrowers must not be Indian citizens aged between 21-65.
  • Businesses must have an ongoing revenue stream, a high turnover annually, and meet the minimum annual income criteria.
  • The company must be in existence for at most one year.

Documents required for commercial loans

A company must submit specific documentation to the lender when applying for a commercial mortgage.

The primary documents are required, however.

  • Evidence of continued business.
  • Completed application form
  • Financial statements of companies for a specific period.

How to Apply For Commercial Loans

In recent years, obtaining a loan has been very easy and fast. If you have completed the paperwork and met the eligibility requirements, the money will be credited to the account in a few days.

Both offline and online applications are accepted for the loan.

  1. You can apply online by visiting the lender’s site, clicking on Apply Now, and filling in all the details, and the lender will contact you.
  2. You can see the lender offline with all the necessary documents. The lender will verify them and then ask you to complete a form. After verification, the loan amount will be transferred within a few days.

Fees and Applied Charges for Commercial Loans

When applying for a commercial loan, a firm or self-employed individual must pay specific fees and levies. A borrower may require pre-payment fees, loan processing fees, and stamp duty. Late payment penalties could also apply.

Final Word

Consider factors such as credit score, interest rate, and fees before you apply for commercial loans. These criteria will help you determine what works best for you. It prevents consumers from making poor decisions, such as choosing an unsuitable lender, selecting an inconvenient term, or borrowing more than they need. Their credit rating is also affected if they fail to make a payment.

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