What Is a Commercial Loan?
Banks and financial institutions extend commercial loans to companies, which use the money for either sourcing their daily operational expenditures or for purchasing capital assets. Commercial loans are particularly sought by new and emerging companies in the market. When they find it difficult to raise equity or debt capital in the market, they resort to commercial loans.
These loans are usually backed by collateral on the company's assets and are for a very short duration of time. The rates of interest are not very high. If the company defaults on the repayments, it risks losing the assets pledged.
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Loan Application
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While making the application for a commercial loan, the lender requires the borrower to submit copies of the company's financial statements. The financial statements provide an indication to the lender about the financial well-being of the business. This way, the lender is able to assess whether or not he would be able to recover his money.
The company must also explain how it proposes to utilize the loan amount. The lender needs to know whether the amount would be used to pay salaries to its personnel, to buy additional raw materials for production, or to purchase an expensive machine.
Loan Terms
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At the time of the grant of the loan, the lender and the borrower clearly agree on the terms and conditions of the commercial loan. The rate of interest on the loan and the tenure of the loan are fixed. Commercial loans are always issued for interim periods of time. The duration is between 30 days and one year. The lender also fixes the monthly date on which the installment is due. The lender explains to the borrower both the scenarios of prepayment as well as nonpayment.
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Creditworthiness
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The lender evaluates the creditworthiness of the company before sanctioning the loan. The lender scrutinizes the financial position of the borrower and decides on whether she must grant the loan. The lender also determines the rate of interest on the loan as per the borrower's financial position. Companies deemed to be financially stable get loans at lower rates of interest than companies that seem financially instable.
Loan Specs
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The commercial loan lender needs a guarantee on the loan. The co-signors indicate that in case the borrower defaults on the loan, they will repay the sum borrowed. At least two co-signors are required for the loan.
These loans are also almost always renewable. That is, on the completion of the term of the loan, the loan can be extended once again for a longer duration. For example, if the term of the loan was six months, at the end of the six months, the borrower could again extend the loan for another six months.
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