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What is a Commercial Loan?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 April 2014
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Commercial loans are bank loans that are granted to different types of business entities. In some cases, the loan is extended to assist a company with short term funding for basic operational functions, such as meeting payroll or purchasing supplies that are used in the production of the goods manufactured and sold by the company. At other times, it may be used to purchase new machinery that is directly connected to the operation of the business.

The commercial loan is often thought of in terms of a short-term source of cash for a business. Some bankers offer what is known as a renewable loan, which allows a business to the secure necessary funds, repay the balance within terms, and then roll the loan into a second or renewed period. This type of loan is often employed when a company needs funds to secure resources to handle large seasonal orders from customers while still providing goods to other clients.

As with most types of loans, the creditworthiness of the applicant will play a major role in the securing of a commercial loan. The business normally must present documentation that proves the stable cash flow of the company, ensuring the lender that the loan can be repaid according to its terms. If approved, the borrower can anticipate to pay a rate of interest that is in keeping with the prime lending rate.

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One of the advantages to this type of loan is that many banks offer them at very competitive rates of interest. Often, the rates will be lower than for other loans, especially asset-based loans. This means that the borrower will have a smaller amount to repay the lender.

As with all financial arrangements, local and national laws regarding the banking industry will dictate the structure and conditions associated with a commercial loan. Any company seeking one would do well to work with the banking institution to evaluate the current working capital needs of the company and look at all possible loan solutions before making a formal application.

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Discuss this Article

anon55453
Post 3

Is the assessment of a commercial loan and a personal loan the same?

anon40290
Post 2

What is a commercial guaranty and how does it differ from a personal guaranty?

CLPAdvisors
Post 1

When you meet with a potential bank, always make sure that you are prepared. The best way to improve the chances of getting your loan approved are to be knowledgeable on the loan process and your business. In addition, when you submit a formal application, make sure that you provide ALL possible information that the bank might want to review. It will give your lender the impression that you have nothing to hide. If you do have something to hide, make sure to address it head-on because the lender will find out about it.

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