Commercial loans are debt financing provided by banks or other financial institutions to businesses to purchase equipment, inventory, or real estate. The proceeds from a commercial loan can finance various business-related expenses, such as inventory, equipment, or working capital.
The terms of a commercial loan will vary depending on the lender, but they typically involve a higher interest rate than a personal loan.
Did you know? Repayment terms for a commercial loan will also vary depending on the lender but typically range from one to five years.
What Are Commercial Loans?
A commercial loan is a loan made to a business rather than an individual. Businesses use commercial loans for various purposes, such as to purchase new equipment, expand their operations, or cover short-term expenses. Banks typically make commercial loans, but several other lenders offer this type of financing.
The repayment schedule for a commercial loan is usually structured as a balloon payment, where the borrower repays a set amount of the loan's principal at periodic intervals, and the remaining balance is due in a lump sum at the end of the loan's term.
Also Read: Types of Loan - What are different Types of Loan in India?
Why Do People Apply for Commercial Loan?
There are many reasons why people apply for commercial loans. Some common causes include wanting to start or expand a business, needing working capital, or wanting to purchase commercial real estate. Possible reasons for taking out a commercial loan include expanding a business, buying new equipment, or managing day-to-day expenses.
No matter the reason, borrowers should have a solid plan for how they will use the loan funds and how they will make repayments. They should also be prepared to provide collateral, such as property or equipment, to secure the loan. A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank.
Process Of Applying Commercial Loan
Commercial loans can be used for various purposes, so borrowers need a clear idea of why they are taking out the loan and how they plan to use the funds
- The first step is to assess your business’s financial needs and goals to determine what type of loan best suits your needs.
- Once you’ve determined the type of loan you need, the next step is to fill out a loan application.
- After the application is complete, the lender will review your financial information and decide whether to approve your loan.
Also Read: Government Loan Schemes for Small Businesses In India
Eligibility Of Commercial Loan
The eligibility for a commercial loan depends on several factors, including the loan's type and purpose, the borrowing business's financial condition, and the lender's standards and criteria. However, businesses seeking a commercial loan should generally have a strong credit history and a solid business plan.
Lenders will also typically require collateral, such as business equipment, inventory, or real estate, to secure the loan.
The requirements for eligibility for a commercial loan vary by lender but usually include the following:
- A minimum credit score as lenders typically require a minimum credit score of 640 or 660 for a conventional loan.
- A minimum down payment as lenders will require a downpayment of 20% to 25% for a conventional loan.
- A strong business history as lenders will want to see that you have a strong history of running a profitable business.
- You were a citizen of India
- The minimum age should be 22 years, and a maximum of 25 at maturity.
- You must associate with your current business for a minimum of 3 years.
- You must have a CIBIL Score of 685 or higher
Additional factors include things like your history of timely tax payments, bank balance, credit utilization ratio, credit history, etc. Your ultimate eligibility will be assessed in light of all of these.
Documents Needed
The documents required to apply for a Commercial Loan vary depending on the type of loan and the lender. However, standard documents required to apply for a business loan include Proof of identity
- Address Proof
- Bank statement for the last six months
- Latest ITR (2-3 years)
- Financials include income statements, balance sheets, profit and loss statements, etc.
- Proof of business establishment
Also Read: How to get an MSME loan without collateral?
Interest Rates
An interest rate is the percentage of an amount of money that is charged over some time. The interest rate calculates the interest payable on a loan or other type of credit. It is also used to calculate the rate of return on investment. The interest rate is usually expressed as a percentage of the loan or credit amount.
For example, if you borrow ₹100 at an interest rate of 5%, you will owe ₹105 at the end of the year. The 5% is the interest rate. The interest rate is usually calculated yearly but can be calculated for shorter or longer periods. For example, you may see an interest rate of 5% per year, but this could be 5% per month or 5% per day. The interest rate can be fixed or variable. A fixed interest rate means that the interest rate will not change during the life of the loan or credit. A variable interest rate means that the interest rate can change over time.
Conclusion
A business loan occurs between a financial institution and a business, used to fund operating expenses and capital prices. Many business loans require collateral, including assets or equipment. Corporations normally have to provide economic statements to show their potential to repay.
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