Loans are crucial for the ease of functionality of any organisation. A Commercial Loan is a credit given to small businesses by banks and other financial institutions. It is primarily used for both short-term expenses as well as long-term investments towards the business.
These loans exist to give smaller businesses access to both small and large credits for multiple purposes ranging from daily operation expenditure to business expansion.
● Evaluation by Bank/Financial Institutes:
The bank will evaluate the financial records like profitability or outstanding debts. Furthermore, the purpose of the loan will also be evaluated. This is done to mitigate the risk undertaken by the bank lending to the borrower.
The business needs to submit certain documents like PAN Card, Business Registration details, Bank Statement of 1-3+ years (depending on the bank), Partnership details, business property ownership/lease details, owner’s identity proof, etc.
● Review and Approval:
These criteria will be reviewed by the bank, and then the amount of loan, interest rates, tenure will be determined based on the fulfillment of the criteria.
Advantages of Commercial Loan:
● Inventory Stocking:
Often the production process or service provided by the business is started before securing any kind of payment from the client. In these scenarios, the business needs to have enough capital to secure materials or supplies.
● Paying wages to Workers:
As mentioned before, it becomes difficult for businesses to maintain cash flow while working for clients on credit. Hence, these loans help secure capital to pay outstanding wages to workers.
● Upgrading tools and machinery:
Some certain deals or orders require businesses to quickly scale up service or production. In such scenarios, these loans enable the businesses to acquire the tools and machinery in need.
● Expansion of Business:
These loans can also be used to make a long-term investment in the business to promote further growth and sales. These investments can range from expanding the facility to hiring more workers.
● Most banks require the purpose of the loan before approval. This results in the restricted use of capital for business needs.
● As these loans are mostly without collateral (unsecured), the interest rates are quite high compared to business loans with collateral.
Some Important Facts to Know About Commercial Loan:
● Often these loans require the businesses to have a certain range of annual turnover. The minimum annual turnover usually ranges from Rs. 3,00,000 to Rs. 5,00,000.
● Furthermore, these loans require the businesses to have certain years of experience. Usually, a minimum of 3-5 years is required.
● The interest (depending on the business type, annual turnover, profitability, loan amount, etc.) can range from 12 – 20%+.
● The loan amount can be from Rs. 50,000 to over Rs. 3 Crores.
● The bank/financial institution may have a 1-3% Processing Fee (one-time).
● The minimum age of the applicant representing the business can range from 21-25 Years.
● Short-term loans’ tenures can range from a few months to 1 or 2 years. While long-term loans can range from 2 years to 5-7 years.