Commercial Loan: Check Eligibility, Interest Rates & Documents Required

Also Know: Which bank has the lowest interest rate on business loan?

The following entities are eligible for commercial loans, such as Public or Private Limited Company, Partnership Firm, Sole Proprietorship, and Limited Liability Partnership.

The documents required for commercial loans vary from one lender to another. However, a few documents that are commonly required by lending institutions are as follows:

Identification Proofs (As per the financier’s terms):

Address Proof:

Proof of Business (as applicable):

Common processing fees include amortization fees, cheque swapping fees, incidental charges, cheque bouncing charges, late payment charges, pre-payment charges, stamp duty, etc. Processing fees depend on financier policies.

Loans provided today are based on the terms of Marginal Cost-based Lending Rate (MCLR) and Repo Rate-based Lending Rate (RRLR), which are reset periodically depending on the economic rate. Commercial business loan interest rates can vary depending on the risk assessment by the lender and other norms specified by regulations. There are also loan processing fees, legal charges, late payments fees, and other costs laid down in the loan agreement.

Commercial loan interest rates depend on a host of parameters that includes the lending institution, security offered, turnover of the company, profitability, cash flows, creditworthiness of the borrower, etc.  Commercial loans are offered for startups, MSME, small businesses, etc.

1. Expanding of Business

Small businesses which have a business model already established with a decent history of transactions can avail the commercial loans to prepare themselves for their next phase of business expansion. Whether they want to expand it across new locations or reach out to a new target audience, these loans would help them make their operations smooth.

2. New Technology and Tools

Small businesses that are looking to purchase new equipment and machinery for carrying out their operations can avail the equipment loan. Banks offer commercial loans especially for purchasing new and costlier equipment which can help businesses in increasing their productivity and giving them a competitive edge.

3. Managing Inventory

When taking up big business orders, especially from manufacturing companies, companies require readily usable raw materials. Commercial loans can prove to be beneficial in such situations and help businesses to buy essential inventory at right time.

4. Raising Working Capital

Maintaining a working capital is crucial to meet all the daily requirements of cash and expenditures to be able to sustain in the market. Commercial loans help in making a perfect balance between keeping liquid cash for daily operations and meeting unforeseen expenditures.

Also Read: Popular Funding Options to Raise Capital for Small Businesses

Commercial loans can also be classified based on the kind of specific facilities and benefits that they offer:

Bank Overdraft Facility - The Bank Overdraft Facility is generally considered to be a short-term loan or more generally, a source of short-term funding that is possible to be returned in the subsequent deposit. This facility allows a commercial enterprise to withdraw funds that are greater than that which is available in the company’s account.

Letter of Credit - A Letter of Credit is a document provided by a financing institution to a customer or trading party that is located in a foreign country. The letter is issued to the seller on the condition that he/she/the commercial enterprise provides certain documents that confirm that payments will be made parallel to the delivery of goods.

Bank Guarantee - Unlike the Letter of Credit, a bank guarantee is a facility that is provided to the customer of said financing institution if he/she fails to ‘pay up. The guarantees a specified sum of money that will be paid to the third party within the limited validity period of the guarantee.

Lease Finance - Lease financing is a kind of secured loan that is offered by the financier without the customer having to completely relinquish his/her rights over the asset collateral. Lease financing is then a method that allows the customer or the lessee to make use of assets while simultaneously, the financier gains legal ownership over the assets and could recover a large portion of the assets with additional gains in terms of interest.

SME Collateral Free Loan - As the name suggests, these loans are made available for SMEs and are collateral-free. While small retailers are not eligible for these types of loans, it can be availed by start-up SMEs.

Construction Equipment Loan - Construction Equipment Loans have secured loans where the equipment itself is the collateral and the repayment period varies from 12 to 60 months depending on the repayment capacity. These loans are commonly used to procure equipment like excavators, loaders, cranes, technologically high-end equipment, etc.

SME Credit Card - The SME credit card loan can be availed as cash credit or a term loan up to a sum of 10 lakhs. The repayment period for term loans is typically 5 years and Cash credit can be repaid in 10 years. SME credit card loans are commonly made available for small retailers, smaller-scale business enterprises, small industries, and transport businesses.

Commercial Vehicle Loans - Commercial Vehicle Loans are generally made available to companies with more than 2 years of experience in a business enterprise with dedicated customers, transporters, and owning at least 2 commercial vehicles.

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