Commercial loans are usually a short-term finance that companies avail to fund their unexpected operations costs and capital expenditures. In early stages of a business, there come various opportunities when you get the chance for inorganic growth but pursuing them would require considerable capital. Moreover, a progressing business has many expenses. In all these scenarios, a commercial loan can be a great monetary source to support your business.
Usage of Commercial Loans
In the last few years, commercial loans have transformed themselves from fulfilling short-term financial needs to the management of payroll and purchasing smaller supplies too. To meet the overall expenses of a business, regardless of a season of huge sales, preferred festivals or changing patterns of consumer behavior – commercial loans always rise to the occasion to meet every type of business needs.
Commercial loans can either be repaid in a defined time limit or a tenure that is chosen by the borrower as per his/her needs. It is usually collateral-free financing and is offered with flexible repayment options. However, a borrower must pay the loan amount completely with the interest accrued in the specified tenure on time to avoid loan default and damage to his/her credit score.
Eligibility for Applying for Commercial Loans
The entity applying for commercial loans can be a partnership firm, a proprietorship, a private limited company, a public limited company, or any other valid entity. Commercials loans are provided by banks and other lending institutions. after the submitted reason for the loan has been appraised by the lending institution. For instance, if a doctor applies for a loan for a clinic, the bank might visit the premises. To avail the loan, a current account with the bank in the name of the company or entity also needs to be activated.
Apart from the balance sheet and the profit and loss account, banks will also look at the cash flow statement of the borrowing firm. There are minimum turnover requirements that the borrower will have to meet. This varies from lender to lender, and the type of business for which the loan is required. The firm should be profitable, expected to make profits within a specified time frame, or have a cash flow for loan repayment.
The borrowing company should have been operational for a certain amount of time, specified by the lending institution. A track record is important in the credit appraisal process. New businesses are expected to give projections of income for the next five years or more.
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:
- PAN of the company and the directors
- Recent GST returns if the business comes under the GST income limit
- Annual statements including balance sheet, profit & loss account, and cash flow statement
- Bank statements for the last six months or more
- Proof of business operations, such as trade license
- Income tax returns of the company and the directors
- Copy of registration papers of the company with the local authorities
- Board resolution relating to the borrowing
- Memorandum and Articles of Association of the company
- Insurance for the fixed assets of the company
Rates of Interest
Loans are provided based on the marginal cost-based lending rate, which is reset periodically depending on the economy rate. 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.
Benefits of Commercial Loans
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 the new target audience, these loans would help them make their operations smooth.
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.
When taking up big business orders, especially of 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.
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.
How to Choose the Right Commercial Loan?
It is generally considered by many businesses that availing a lower small business financing loan would be the best option to choose – given that, they are easily repaid back. Even though term loans are low-cost, they can be difficult to be chosen by small businesses. This is because the process of applying for these loans takes a long time. Hence, decide on what amount would you need to borrow. This will depend on how many years you have been in business for, yearly turnover, daily operating expenses and other unforeseen expenses.