A commercial loan, as the name suggests, refers to a loan that is offered to a business by a financial institution. This type of loan can be utilised for commercial purposes. This loan is provided through a debt-based funding agreement between a business entity and a lender. Both banks and non-banking financial corporations (NBFCs) offer commercial loans to companies and firms. Commercial loans are not offered to individual loan applicants for personal reasons.
These loans help corporations meet their financial expenses for their various activities. Some of the expenditures include working capital expenditures, operating expenses, etc. Commercial loans are sometimes known as business loans too. These loans are typically offered for a short tenure. The tenure can range from 1 month to 1 year depending on the company’s requirements.
These commercial loans are very helpful to small businesses that may not have sufficient funds to take care of different financial requirements. Many small businesses may not be eligible to apply for regular loans due to eligibility criteria, high upfront fees and charges, and strict regulatory obstacles. Hence, small businesses have to rely on alternative debt products for financial assistance and these can be consumer credit, unsecured loans, commercial loans, a line of credit, term loans, etc.
In India, one can choose from business loans and business installment loans provided by banks and NBFCs.
Features of Commercial Loans
- Commercial loans are provided to a business entity and not to individual consumers.
- They can be utilised by organisations to handle financial expenses such as purchasing equipment, buying and installing machinery, purchasing inventory, buying office furniture, purchasing vehicles for company purpose, construction, renovation of office location(s), etc.
- Commercial loans can be secured or unsecured in nature. If an organisation chooses a secured commercial loan, then they will have to provide a collateral or security to the lender. In this case, the interest rates will be lower as the level of risk is low for the lender. If a company wants to apply for an unsecured commercial loan, then the rate of interest will be slightly higher as the lender will face a higher level of risk since there is no security involved in this loan agreement. If you take a commercial vehicle or asset loan, this particular vehicle or asset will be hypothecated to your lender.
- Commercial loans are provided for a short period. This can range from 30 days to 1 year. It is sometimes given for a longer tenure too. This will depend on the lender. When you apply for commercial equipment loans or commercial construction loans, you can choose a longer tenure for up to 4 or 5 years.
- Commercial loans can cover revolving lines of credit, short-term debt, long-term debt, etc.
- Commercial loans are offered at fixed interest rates or floating interest rates. If you have a fixed interest rate, your interest will remain fixed throughout the tenure. If you have a floating interest rate, your interest will fluctuate with changes in the market.
- You can repay a commercial loan through post-dated cheques, Electronic Clearing Service (ECS), Standing Instruction (SI), etc.
- Typically, when you make the last payment of your commercial loan, the asset that is hypothecated with your lender will now be in your name and you can revoke the lien of the lender on your company’s vehicle or asset.
- Commercial loans also help companies in purchasing supplies, buying raw materials, funding production processes, handling payroll needs, etc.
- Commercial loans can be taken for purchasing real estate properties too. These loans will be commercial mortgage loans that help a firm in purchasing commercial properties.
- Commercial loans are sometimes provided to self-employed professionals or non-professionals so that they can purchase property or any other asset for their firm’s requirements. These individual loan applicants can be lawyers, doctors, engineers, architects, consultants, contractors, etc. and they will have to apply on behalf of their firm.
- These loans can be utilised for expanding company operations too.
Eligibility Criteria for Commercial Loans
- Partnership firms, sole proprietorship firms, public limited companies, private limited companies, and self-employed professionals and non-professionals can apply for commercial loans or business loans in India.
- The business entity that needs a commercial loan should have a good turnover. The turnover requirement will differ from lender to lender. You can check with your lender.
- Each loan applicant should meet the minimum annual income requirement as a firm.
- The firm should have been making profits for a certain period, which will be specified by the lender.
- The company interested in a commercial loan should have been in business for a certain period, which will be mentioned by the lender.
- The minimum age criterion for an individual who is applying on behalf of his or her firm is typically 21. The maximum age requirement is 65 years. This can change from lender to lender.
Documentation Process for Commercial Loans
While applying for a commercial loan, a firm or individual will have to compulsorily submit certain documents to the lender and they include:
- PAN card for firms, companies, and individuals
- VAT or GST statements for a certain period
- Balance sheet
- Income tax returns for a certain period
- Profit and Loss statement for a certain period
- Bank statements for a certain period
- Proof of continuation in business. The company can submit trade license, sales tax certificate, Income Tax Returns, establishment certificate, etc.
- Certified Copy of Partnership Deed
- Sole Proprietorship Declaration
- Board resolution
- Certified true copy of Memorandum and Articles of Association
Fees and Charges for Commercial Loans
While applying for a commercial loan, a company or a self-employed individual will have to pay certain fees and charges. Apart from paying the interest rate, the loan applicant may have to pay loan processing fee, amortisation fee, stamp duty, cheque swapping fee, legal or incidental charges, cheque bouncing charges, late payment charges, pre-payment charges, etc. The charges will be mentioned to you by your lender before you apply for the loan. You can view your commercial loan policy document for full information about the various fees and charges.
As a company, a commercial loan is a great financial instrument for meeting the various financial requirements extensively. While applying for a commercial loan, the organisation should prove that it has a regular, good cash flow. This will help the lender be confident that the borrower can repay the loan installments in a timely manner. In some scenarios, lenders may ask the loan applicant to take insurance for assets that have been purchased with the loan, especially if the assets are of high value.
A GST rate of 18% will be applicable on banking services and products from 01 July, 2017.