Commercial Loans are short-term credit given by banks/lenders to usually small businesses who need it to maintain cash flow. The capital gained from these loans can be either secured (with collateral) or unsecured (i.e. without collateral). This capital can be then used to boost the business by getting more inventory, machinery, tools, advertisement, etc.
Commercial Loan Interest Rates usually differ from lender to lender, the loans without any collateral usually have higher interest rates than those with collateral.
When to take Commercial Loans:
- The perfect time to avail a Commercial Loan will depend on the cash flow of the business and capital in hand.
- Timing will also depend on the ability to pay it back from the capital gained from future deals. Usually, banks will see the history of such deals or profitability of the business in a particular period before approving the loan or determining the interest rates to be offered.
- The best purpose of taking a commercial business loan is to improve the long-term gain and growth of the business. This means that the capital from the loan can either directly go towards securing more deals in the future or that can be utilized in enhancing the infrastructure to attract more deals, indirectly.
Eligibility Criteria for Commercial Loan:
- Age – People applying for commercial loans must be 21 years old or over (till 65 years old).
- NGOs, Charity Organizations, etc. cannot apply for these loans.
- At least 5 years of profitability or projections of profitability must be shown.
- Some lenders may require the firm/organization to have existed 3-5 years before application.
- Some lenders may also impose the minimum net worth of the firm before approval.
Advantages of Commercial Loans:
- These loans have the option of having collateral or being unsecured.
- Business Growth:
The capital gained from these loans can be used to reach new customers, or expand to new locations. It can be also used to increase the number of products or services provided.
- Getting a boost in capital for higher profitability:
The amount from the loan can also be used to increase the capital of the business by increasing inventory. This will allow the business to proceed with multiple high-volume deals at once. This is especially important to manufacturing firms.
- Enhancing the infrastructure, machinery, and tools:
The other way of boosting profitability is by increasing production capacity to cater to more customers. To achieve this, a significant amount of investment needs to be made towards upgrading machinery and getting new tools as well as improving the manufacturing or services’ infrastructure.
Furthermore, this capital can be used to hire more workforce to boost productivity.
What affects the Commercial Loans Interest Rates:
As mentioned before, whether the loan is secured with collateral or not plays a big role in determining the interest rates.
Loans with collateral will have lower interest rates than those which do not.
- Age of the business:
The number of years the business has been active, specifically the number of years it has been profitable, and the growth rate of the business is also factored into the rates.
- CRISIL and CIBIL Score:
The credit score of the individual/firm running the business also determines the rate. It also depends on the payback history of past loans, as well as other ongoing debt.
- Type of Business:
The type of business enables the lender to decide upon the counter-offer for the loan amount, which directly determines the interest rates as a result.
- The business profitability and revenue, as well as the future expansion plan, may also be considered for determining the interest rates.
Types of Commercial Loans:
- Term Loan
- Letter of Credit
- Bank Overdraft
- Financed Lease
- SME (collateral-free)
- SME Credit card
- Construction Equipment loan
- Commercial Vehicle Loan
The Commercial Loans’ Interest Rates will also depend on the type of commercial loan.