What is a Commercial Loan – Application Process, Pros and Cons

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In recent years lending institutions have steadily increased the credit options for medium-sized and large commercial ventures owing to numerous factors. The most important reason behind this upsurge is that the MSME sector has generated more than 11 Crore jobs across India. 

Besides this, increasing economic strength, employment ratio, and enhanced entrepreneurship mindset of the Indian youth encouraged lenders to develop new financing products. Therefore, this guide will aim to educate you about the application procedure, benefits, and drawbacks of a commercial loan.

What Is a Commercial Loan?

A commercial or business loan refers to a financing strategy businesses often rely on to support their working capital needs. These short-term credit options help businesses meet costs incurred while buying new machinery, building new manufacturing plants, etc. 

Commercial loans can involve mortgages, or they can be collateral free. While submitting a request for a commercial loan, the proprietor needs to submit the following papers:

  • Address proof of the business establishment
  • Financial statement of the venture
  • Business vintage evidence

What Are the Features of Commercial Loans?

  • Business people can use the principal sanctioned in commercial loans only to facilitate infrastructural developments, purchase capital equipment, support staff wages, etc. 
  • Generally, the loan amounts must be repaid quickly (30 days to 1 year). However, companies get an extended tenure of 4 to 5 years when they borrow a substantial principal amount.
  • Commercial loans can be repaid using post-dated cheques, electronic clearing services and standing instructions.
  • Secured commercial loans involve a company vehicle or other asset class as collateral whose ownership is duly returned to the borrowing entity after successful repayment. 

Who Are Eligible To Apply for Commercial Loans?

You may apply for these loans if you fall under any of the brackets mentioned below:

  • Self-employed individuals, public and private limited companies, sole proprietorships, and non-professionals with a healthy credit score can apply for commercial loans.
  • The annual turnover of the applicant must meet the credentials pre-set by the lender.
  • The business should register significant profits for a certain period, as mentioned by the lender.
  • Business vintage proof should match the requirements set by the bank or NBFC.
  • The applicant’s age usually cannot exceed 65, although this upper age limit can change from lender to lender. 

How to Apply for a Commercial Loan?

You can follow the steps below to apply for a commercial loan from any major financial institution of the country:

Step 1: Visit the official website of a commercial lender

Step 2: Navigate to the ‘Loans’ section

Step 3: Follow the guidelines and fill in the application forms

Step 4: Upload copies of documents required

After these steps, your loan application will be scrutinised. After verification, you will receive the credit amount.

Documents to Apply for Commercial Loan

Documents required to apply for a commercial loan are as follows:

  • PAN Card of the concerned entity (company/individual/partners)
  • Balance sheets
  • GST/VAT statements (whichever is applicable)
  • Proof of business existence (this includes sales tax certificate, IT returns, trade license and additional papers addressing the same statement)
  • Declaration of proprietorship
  • Directors’ Report
  • Memorandum of Association

What Are the Advantages of Opting for a Commercial Loan?

Several desired benefits make commercial loans a go-to credit instrument in the business world. 

  • Businesses can invest and take immediate steps to expand their production and range of services after receiving financial aid through a loan.
  • Some commercial loans offer extended repayment tenure of up to 10 years which remarkably reduces financial stress and helps the proprietors focus solely on business operations.
  • Commercial loans are better than smaller business loans as they offer greater instalment flexibility. In addition, substantial tax deductions are associated with the interest you pay the lender against the borrowed principal.
  • Resorting to commercial loans ensures you retain equity and still arrange for the required cash flow. Therefore many business people consider opting for commercial loans instead of entering into a partnership business.

What are the Disadvantages of Commercial Loans?

Before finally filling out the loan application form, you must develop a general perception regarding commercial loans.

  • Though regulated under RBI, different lenders have set different standards when it comes to eligibility criteria. Therefore you must maintain a good credit score (ideally above 750) and ensure that your current revenue statistics meet the lender’s expectations before applying for a loan. 
  • The clause above leads to the second condition linked to commercial loans, i.e., often, these plans are secured. It implies that you may have to put one or more of your assets as collateral throughout the tenure. If you fail to repay the outstanding balance, the collateral gets transferred to the lender, who can then sell it to recover their expenses. 
  • A commercial loan is another expense for your company, among many others. Thus, your liability seems affordable only because it has been broken into smaller instalments with market-competitive interest rates. 
  • Additional fees are associated with commercial loans, including processing fees at the time of form initiation. Before choosing a credit partner, it is wise to compare these additional costs as it helps you save money in the long run.  

For specific industries like real estate, a commercial loan is genuinely effective. Numerous companies offering commercial loans are now available in the market. Therefore, before you opt for a business loan, you should conduct a thorough personal research based on the above-mentioned parameters. Before finalising, check your budget and business potential and decide how much you should borrow to clear off the pressing issues.

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