Commercial Loans Meaning

Types of Commercial Loans

The various basis of its classifications is repayment term/time, lending authority, loan amount, etc. Let us begin with the simplest version.

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#1 – Term Loans

It is the most basic loan that banks lend to business owners. And as the name suggests, it has a fixed repayment term, interest rates, and maturity date. Usually, term loans with collateral carry lower interest points than those without collateral. It is because the risk without collateral is more for the bank. The classification based on the term is as follows: –

#2 – Bank Overdraft Facility

Consider this. Betty needs to pay $150,000 immediately to her supplier. However, the customer has promised to pay $180,000 after three days, and she has only $10,000 in her bank account. So, the best course would be to go to her banker and avail a bank overdraftOverdraftOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings or current account even if their account balance is or below zero. Its authorized limit differs from customer to customer.read more facility for a $20,000 deficit. The biggest benefits of bank overdrafts include lower interest rates than term loans and the least documentation.

#3 – Letter of Credit

A letter of creditLetter Of CreditA Letter of Credit (LC) is issued by a buyer’s bank to ensure timely, full payment to the seller. If the buyers default, the bank pays the sellers on their behalf.read more is a document issued by the bank to your supplier that guarantees payment based on which he will supply goods to you. It is widely used in import-export transactions whereby the parties do not know each other.

#4 – Leasing

Leasing is a financing medium that allows companies or individuals to own specific assets for interim payments for a particular period. In normal circumstances, the asset reverts to the lessor at the end of the lease LeaseLeasing is an arrangement in which the asset’s right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more unless mentioned in the agreement.

Points to Consider

  • The process of availing of the loan, guarantee from banks Guarantee From BanksThe term “Bank Guarantee,” as the name suggests, is the guarantee or assurance given by a financial institution to an external party if the borrower cannot repay the debt or meet its financial liability. In such an event, the bank will repay such an amount to the party that has been issued with the guarantee.read more, and Letter of Credit is often time-consuming and has higher documentation costs. Some sources, such as bank overdraft facilities, require minimal documentation and are less time-consuming. That streamlines the prospect of fundraising as per the company’s requirements.It is crucial to think about a strategic partner for advice on various business operations Business OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more, markets, etc. In case you do, then VC or PE is a better choice. However, if you need money, commercial loans are the way forward.When you default on repayment, your credit rating reduces. Its adverse effect would be felt when you go for the next round of finance as the loan terms would change.A company that frequently borrows may not reap many benefits for its shareholders. From a monetary aspect, EPS reduces.In recent years, many companies have gone bankrupt because of their inability to pay their debt. Therefore, the appraisal of the entity in this aspect is essential.

This article is a guide to the Commercial Loans definition and types. We also discuss the most noteworthy points related to commercial loans for business. You can learn more about it from the following articles: –

  • Commercial Credit DefinitionCommercial Bank DefinitionTop 5 Careers in Commercial BankingNinja LoansWorking Capital Loan