Basic Information on Commercial Loans

Basic Information on Commercial Loans


Commercial loan is a funding arrangement which is debt-based between a financial institution and a business. This is mainly used to fund capital expenditures considered as major or even cover costs of operations which a business is not able to afford. Steps for getting a commercial loan are as follows:

  • Establishing reasons for applying for this loan.
  • Application along with the required documents.
  • Providing collateral.
  • Business plan specified.
  • Considering the different lenders which also include credit unions and local banks.
  • Improving credit score.
  • Approaching lenders after a careful research.

Basic Requirements for a Commercial Loan:

Commercial loans are getting difficult as lender requirements are getting stricter. This is due to the fact that a lender wants to be sure that he is covered at all costs. The top requirements for this loan are:

1. Property Value Documented:
The value of the property which is mortgaged needs to be similar to the mortgage loan which is requested. The sum of the borrower’s property value and net income divides the amount of mortgage after an appraisal. This is done using the ratio of loan-to-debt. To qualify for the loan this percentage needs to be no more than seventy-five.

2. Cash Flow Property:
Lenders prefer a 20% greater than the debt of steady income. The borrower needs to prove his/her experience in running the company, income and expenses. The lender can also demand a proof of the savings and of the assets which can be converted into the required cash in case of problematic loans.

3. The Assets and Income of the Guarantor:
The guarantor is normally the owner of the business, who can guarantee that the loan will be paid even in case of the business default. The assets, credit history and income need to be given to the lender.

Types of Commercial Business Loans:

Here we talk about commercial loans and the different types you can apply for.

Short Term Loans:

  • Accounts receivable Loans: This type of a loan allows you to cater to the monthly operational costs while waiting for the payments from your clients. This loan is based on customers who is credit worthy.
  • Lines of Credit: This line of credit loan allows you to draw money according to your need up to your credit limit. This line of credit is specifically designed to meet requirements on a short-term basis. This can cover your financial needs seasonally and expansion of inventory. These can also be helpful in covering the cost of operating. These are opted mostly by those depending on seasonal businesses. This can further be used as a protection against overdraft for the commercial account.  

Long Term Loans:

  • Vehicle and Equipment Loans: The repayment of the equipment and vehicle loans depend on the age and type of collateral. Purchasing machinery or even a vehicle for your business is easy with these loans.
  • Construction Loans: These loans are apt for paying off the costs of construction, labor and material till the time the project is refinanced. You can also incorporate the land purchase as a part of this commercial loan.
  • Real Estate Loans: This is either for refinancing, purchase or the constructions of apartments, office buildings, industrial building, retail building or even medical offices.

With so many loans available, it gets easier to ensure the smooth running of a business. Before opting for a specific type of commercial loan it is advisable to consult a professional who has the required knowledge and qualifications. This can help you in making the right choice of the loan. For a lay man this is all very complex and confusing. Make sure you seek the help of a well reputed professional and not just any one.



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