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The Role of Commercial Financing in Businesses

Companies borrow money to ensure that their working capital will not be exhausted. Commercial business loans are the most common approach for funding new business ventures. These loans can help businesses grow their companies. If you haven’t applied for a business loan before, chances are, you funded your business with your personal credit and savings. In particular, commercial loans cater to businesses rather than individuals.

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Types of Commercial Loans

A lot of financing companies offer different kinds of commercial loans.

  • Term Loan

This type of loan is provided to a business that needs to be paid back in a short period of time. It has a fixed interest rate that requires payment monthly or quarterly payment. Term loans can be both secured and unsecured. Secured term loans are those supported with collaterals and usually have lower interest rate. Unsecured term loans are not supported with collateral therefore a higher interest rate is imposed on them. Term loan is further classified as short term loan, medium term loan and long term loan depending on the repayment period.

 

  • Bank Overdraft Facility

A bank overdraft facility refers to the ability of a company to draw funds greater than the available in the current account. The actual size of the facility and the interest to be paid on overdraft is agreed upon prior to sanction. A bank overdraft is typically considered as short term funding as it can be covered with the next deposit.

 

  • Business Lines of Credit

It is the most flexible type of commercial loans as it lets borrowers to get approval for funding up to their maximum needed amount while accruing interest only on those funds.

 

  • Equipment Loans

When purchasing a vehicle, computers, manufacturing equipment, or any other high cost fixed asset, choosing an equipment loan is the best way to fund them. Equipment loans are typically in the amount of the cost of the purchase and repayment terms are based on the useful life of the equipment.

 

  • SME Collateral Free Loan

This type of loan is usually granted to SMEs and is collateral-free or without third party guarantee. It is made available to SMEs for the purpose of start-up, purchase of machineries, support expansion plans and to serve as additional working capital. It is important to note here that business involve in retail trade are not eligible to apply for this type of loan.

Benefits of Commercial Loans

As mentioned earlier, commercial loans are made for the benefit of business. These are just some benefits of commercial loans that might be applicable to you if you are interested in applying for a commercial loan.

  • Commercial loans offer the lowest interest rate of all the loan options. With this, businesses will be able to maximize their funds for other important matters.
  • Loans are offered in short term or long term basis. If you choose a long term loan, this will allow your business to pay the loaned amount slowly as you work to increase your profits.
  • Some commercial loans are unsecured or don’t need collaterals. It saves you the hassle of finding third party to guarantee your loan.
  • You retain complete ownership of your business. Some venture capital investments require an ownership portion of your business. Commercial loans allow you to have access to additional funds while retaining the ownership of your business.
  • The low interest rates and flexible long-term payment provide the most cost-effective loan option for business owners. That’s why a commercial bank loan is often preferred for obtaining a start-up capital.
  • Commercial loans allow you to establish business credit. If you only rely on your personal credit and savings, you cannot establish a good credit standing for your business. A commercial loan is a good way to raise your credit rating. Your first loan is a good start to demonstrate your handling financial responsibility. Though you might not need a loan today, applying for one can actually help you when the time comes that you need it.

Since commercial loans are long term and often involve a lot of money, they also have rigorous approval process. But if you succeeded in applying for one, this is a good way to manage your business more efficiently and more effectively.