What are Commercial Loans?
A commercial loan is a type of loan agreement between a financial institution (lender) and a business (borrower). Typically, upon approval the lender will issue funds based on the agreed upon contract with terms illustrating how and when the borrower must repay the loan. Businesses apply for commercial loans for many reasons, some of which include:
- Funding to purchase new equipment
- Funding to cover operational costs
- Funding to cover seasonal or peak inventory/costs
- Funding to cover payroll
- Funding to cover manufacturing or production process
Commercial loans can be renewable or revolve depending on the terms of the agreement between lender and borrower. A renewable loan may require the borrower to repay the original loan by a set time, and if the terms of the agreement are upheld, the borrower may be able to renew the same terms to re-borrow the same loan. If a loan revolves, most frequently seen with lines of credit, the borrower has a requested amount of capital available to him or her. So, like a credit card, a borrower can maintain the same maximum spendable limit if they pay back the amounts they borrow in a commercial loan line of credit.
Example of Commercial Loans
Commercial loan lenders are most concerned with a business’ ability to repay a loan and how the loan can be secured if a borrower cannot pay. A commercial or business loan can be secured by receivables or personal property. So, let’s say you own a clothing store and are applying for a commercial loan, the owner or borrower can secure the loan with personal property, i.e. inventory of ready for purchase clothing, or by accounts receivables which is the promise of customers to pay for clothing ordered.
Regardless of how the borrower intends to secure a commercial loan the application process is almost always the same when it comes to providing documentation. Thus, a borrower should be prepared to provide the following information in any commercial loan application process:
Your Business’ Experience: All lenders are interested in a borrower’s experience and track record. If your business has been operating for some time, you will want to highlight the successes so far, and any growth potential you see as the owner.
Your Business Plan: You will want to demonstrate your organization, mission and projections to a lender. They want to see how serious you are, and how effective your business can be with the loan in the industry that it’s in. A strong business plan can go a long way in a microloan application.
Overview of Financial History: Information on previous lines of credit, other loans, balance sheets and tax returns will assist a lender see that you, as the business owner, are running a financially healthy business. Even if your business has not been established for very long, financial diligence can go a long way.
Insurance Coverage: A lender will want to review all insurance information. If a lender issues a commercial loan to assist your company’s success, part of your company’s success is contingent upon it being insured in the event of an accident or emergency.
Commercial loans are business loans, secured for short or extended periods of time. Depending on the terms of a borrower/lender agreement commercial loans have the option to be renewable, consist of a one-time lump sum installment, or revolve. If you are interested in applying for a commercial loan it is important you assess the main reason behind why a commercial loan is right for you. If you require financial assistance for your business’ operational costs, a commercial loan may be right for you. Applying for a commercial loan is a straight forward process. In meeting with a lender, you will want to come prepared with documentation to support your business’ stability and health. As in any other funding process you always want to shop around for the best deal that suits your financial needs and business goals. If you are serious about applying for a commercial loan, don’t be hasty, and remember preparation and organization is key.