written by | December 26, 2022

Eligibility For Commercial Loan: Interest Rates And Documentation

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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

  1. Address Proof
  2. Bank statement for the last six months
  3. Latest ITR (2-3 years)
  4. Financials include income statements, balance sheets, profit and loss statements, etc.
  5. 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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FAQs

Q: What are the repayment terms for a commercial loan?

Ans:

Repayment terms for commercial loans vary by lender but typically involve the borrower making fixed monthly payments over the years. The lender will determine the exact terms at the time of loan approval.

Q: What is the application process for a commercial loan?

Ans:

The commercial loan application process varies by lender but typically involves the borrower submitting a business plan and financial statements. The lender will review the application and decide whether to approve the loan.

Q: What are the risks of a commercial loan?

Ans:

Commercial loans can be risky for both lenders and borrowers. Lenders may be at risk if the borrower cannot repay the loan, while borrowers may be at risk if the property or equipment purchased with the loan is not used for business purposes.

Q: What are the benefits of a commercial loan?

Ans:

Commercial loans can provide businesses with the financing they need to purchase property or equipment, which can help them to grow and expand their operations. Commercial loans can also finance the construction of new buildings or the purchase of existing buildings.

Q: How do commercial loans work?

Ans:

Commercial loans typically work by the lender providing a loan to the borrower to purchase property or equipment for business purposes.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.