What is a Commercial Loan?

Are you thinking of putting up a business, but don’t enough financial resources required for it? You can loan money from financial institutions to help you get your business off the ground.

Putting up a business requires a lot of invested resources such as money, time and effort. But it is not easy to dole out a huge amount considering that any investment is both a risk and an opportunity to succeed. Many entrepreneurs are now taking advantage of financial institutions offering loans to start up a business. These are called commercial loans.

What Commercial Loans Are For

Commercial loans are also called bank loans where companies are granted financial assistance to support short-term projects. Some grantees use the fund to purchase supplies or aid in payroll or contract machinery for business operations. Banks could only grant loans on a short term basis to provide security because it is too risky for these financial organizations to allot huge loans for business entities that are entitled to declare bankruptcy. These short-term loans are called renewable loans. Through this, companies can reapply for another financial assistance once they have paid the previous principal and interest in full.

How to Get a Commercial Loan

Any company can apply for a commercial loan, whether they are small or large businesses. However, banks need
to verify their credit reliability and prove that these companies have stable cash flow. Applicants will have to submit tax returns and purchase receipts to ensure the lender that the loan will be paid according to the terms and conditions set forth before the approval of the loan. Interest rates also vary depending if the lender is a prime or subprime loan institution. If the bank who will grant the loan belongs to the prime group, expect a higher interest rate. The opposite goes for lenders that belong to the subprime group. But interest-wise, applying for a commercial loan through banks is more competitive and more practical compared to obtaining financial loans from lending companies.

One of the advantages of using a commercial loan for business purposes is that your company may or may not be exempted from business taxes depending on the usage of the fund. If for example, you intend to use the loan for some charity or community work where there is no return on investment, the Bureau of Internal Revenue will impose lower or zero tax rate for that particular project. You also need to know that even though a company is able to prove their reliability in repaying, the amount of loan that can be approved shall be based on the company’s income flow.

The first screening that an applicant will have to undergo is the FICO. The lender assesses the company’s credit score and determines the level of risk associated to approving the application. If the risk is high, the lender has an option to lower the amount of loan being applied or discredit the application. With a higher FICO rating, the company has higher chances of obtaining a successful commercial loan application.

In cases of declaration of bankruptcy, the lender can only pull out items that can be resold to be subtracted on the total amount of loan received by the applicant. In that event, the bank shoulders the burden of unpaid loans.