What Is Commercial Debt?

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Image of a businessperson at work.
Image of a businessperson at work. (Image: moodboard/moodboard/Getty Images)

Many businesses turn to commercial debt as a way to finance projects and day-to-day operations. This term refers to debt owned by a private sector creditor, usually a commercial bank. It can come in the form of short-term, intermediate-term and long-term loans, as well as credit cards. Creditors with secured debt have easier access to business assets, but businesses still have an obligation to unsecured and informal creditors.

Commercial Loan Length and Rates

Commercial loans may be short-term, intermediate-term or long-term loans. Short-term loans generally are due within 6 to 18 months, while intermediate loans are paid back within three years. Long-term loans usually are due within five years. As a rule of thumb, you'll pay higher interest rates on shorter loans. However, since you're paying back the principal over a shorter period of time, you may not incur as much total interest expense compared to a longer loan.

Commercial Credit Cards

Although business owners often associate commercial debt with bank loans, credit cards are another source of commercial debt. Many small business owners turn to credit cards as a way to finance initial business costs. Credit cards may be easier to procure compared to a business bank loan and many have lower introductory interest rates. However, the interest expense can add up quickly once the promotional period expires.

Secured Versus Unsecured

Commercial debt can be secured or unsecured. Secured debt means that some asset is held as a security interest or collateral by the commercial institution. The collateral for a secured business debt could be a vehicle, property, buildings, equipment, furniture or even inventory. If a business defaults on the debt or fails to make payments, the creditor has the right to repossess the collateral. Unsecured creditors that don't have any security interests generally have to sue the business before collecting any property.

Other Financing

Commercial debt isn't the only option for business owners to finance operations. Owners can issue equity in order to raise capital, but many prefer not to dilute their ownership and voting rights. Small business owners also can choose to informally borrow money from friends and family. However, in the event of a bankruptcy, the business must pay off creditors before refunding equity to owners.

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