A commercial loan is a loan that is sanctioned for commercial use rather than for individual consumer use. A commercial loan, or business loan, is one that is taken for business related reasons. You might be a small entrepreneur who needs funds for a variety of reasons like buying office equipment, larger business expansion or maybe even software development – a commercial loan is designed for these requirements. A consumer loan, on the other hand, is taken by an individual for personal reasons – to buy a home or vehicle or to tide over personal financial shortfalls. Many small businesses depend on commercial loans from banks for an injection of capital since they do not have access to the debt and equity markets unlike large companies.
When to apply for a commercial loan
There are several situations where it might be a good idea to apply for a commercial loan. These include:
Expanding the business: If your business is profitable and you have a clear and well- thought out plan for expansion, you stand a good chance of securing a loan. When you have a positive cash flow and a clear vision on how you will use the funds to expand, banks will be willing to lend to you.
Buying equipment: If you are in need of equipment – whether heavy machinery or office computers, a business loan is a good way to access funds. Moreover, the equipment purchased can be held as collateral by the lender without requiring any further security from the business owner.
Buying/renting real estate: If your business is growing and you have outgrown your current space, then borrowing from a bank to finance your new premises is a sound reason to apply for a loan. It could be that your store needs more space to fit extra inventory or maybe your office has become too small for the number of employees. Or you might need real estate for manufacturing or storage reasons. Real estate can be very expensive and a big financial burden on a small business owner, which is why a commercial loan is a good source of funds.
Building credit for the future: Small or young businesses can find it very difficult to access large loans from the banking system since they lack the requisite credit profile. In order to build up a solid credit history that will allow borrowing in the future, some business owners take out small business loans with the sole purpose of creating a strong credit profile. Of course, the most important thing to remember is to make all the repayment on time and in full so that you have a spotless credit record when you do decide to apply for a large loan. If you delay or skip payments on your business loan, your credit worthiness will suffer and you will find it even more difficult to be approved for loans in the future.