Definition of Commercial Lending
Commercial lending is a financial institution's act of loaning money to a business entity. Lending rules vary from one financial institution to another, but they are generally grounded in the notion that the amount of money lent will depend on a combination of factors regarding your business. The more convinced the bank is that your business will succeed, the larger loan you are likely to be approved for.
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Legal Definition
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According to Section 25 of the Federal Reserve Act, commercial lending is when "any organization, other than a bank...engages in the business of making commercial loans." Furthermore, a commercial lending company is accountable to the laws of the company's home state regarding credit balances, credit reporting and banking laws. When a commercial lending company loans another business money, it is a commercial loan.
What Makes Commercial Lending Different
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While personal loans for individuals usually only require credit, reference and sometimes background checks, commercial loans follow a more intense procedure. Besides the initial application, commercial lenders usually want to meet with the business owner face-to-face, perhaps even at the proposed company's facility. Commercial lenders have loan officers whose expertise is in determining the likelihood of a successful business plan. While traditional loans can be determined by simple mathematical calculations to determine the probability of repayment, commercial lenders know that if a business fails, the money they lent to the institution is unlikely to ever be repaid. Therefore, the business requesting a loan has to be fully prepared to present a business plan and well-constructed explanation of where the funds from the loan will be dispersed, as well as why this plan will be a success.
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Collateral
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Repayments of commercial loans is often funded by collateral. When a commercial lending institution is on the fence about whether or not to issue a loan of great amounts to a business, the significance of collateral can be the make or break difference in whether or not the loan is approved. A company that can offer the funds from sale of its real estate is more likely to be approved for a large loan than a home-based business that may have no collateral to offer in the case of business failure.
Acquisition and Development
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A popular type of commercial loan is "acquisition and development lending." In this subcategory of commercial lending, financial institutions grant money to a company based on its likelihood of success in an expansion and development plan. If granted, these funds are meant solely to obtain and develop property that will help the business to grow and succeed. The achievement of the plan then establishes the likelihood of another commercial loan being awarded in the future, as well.
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