What are commercial loans in India ?

In India, you can easily start a company by raising funds. As a business owner seeking funds, you may come across a wide range of loan products in the market. A commercial loan is one such financing option. In this article, let us look at what a commercial business loan is, how it works, and what documents are needed to avail of this loan.
 
What are commercial loans in India? 
 
A commercial loan or commercial financing is a funding arrangement between a business owner and a lending institution. The money obtained from this loan product is utilised for funding capital expenditures such as machinery purchase, new office set-up, or covering daily operational expenses. It is most commonly used by businesses that are unable or unwilling to raise funding from venture capitalists or angel investors. Small and medium businesses can easily overcome the hurdle of funding without losing their equity by using business commercial loan products such as term loans, lines of credit, and SME collateral-free loans. 
 
How do commercial loans work? 
 
Financial institutions grant commercial loans to assist firms in meeting short-term capital requirements, primarily for operational expenses and machinery purchases. For such loans, lenders normally have a predetermined set of criteria as well as terms and conditions. The maximum repayment tenure is also predefined. In most circumstances, commercial financing works in the same way as traditional business loans. It means the borrower must repay the loan amount with interest within a fixed time frame.
 
               Also Read: A Quick Guide To Finding The Right Loan For Your Business
 
Types of commercial loans in India: 
 

• Term loans: 

This type of loan is very common in India and usually does not require any introduction. Term loans, as the name suggests, are approved for a specific time frame within which the borrower should repay it along with interest. Term loans are further classified into short-term loans (less than a year), medium-term loans (12 months-36 months), and long-term loans (above 36 months). Concerning collateral, it is divided into secured and unsecured loans. Commercial loan interest rates on secured loans are lower as compared to unsecured loans. 
 

• Bank overdraft facility: 

Such types of loans help businesses to withdraw funds over what's available in the business’s current account. It is a short-term funding method, and the terms and conditions of such loans are decided before the sanction. In simple terms, it is a credit extension when the account balance reaches zero.
 

• Letter of credit: 

Commonly referred to as a credit letter, it is a document given by a financial institution that guarantees that the buyer will make timely payments to the seller. If the buyer fails to make the payment, the financial institution pays the full or remaining balance on the borrower's behalf.
 

• Bank guarantee: 

It is a commitment made by a financial institution that if a particular borrower defaults on a loan, they will cover the losses. In this type of commercial loan in India, the financial institution promises the original creditor that if the borrower fails to satisfy the obligations, the financial institution will be liable to pay for the losses. This financing option enables a business to purchase goods and services that it would not otherwise be able to, thus assisting young entrepreneurs to grow and explore new opportunities without any hurdle. 
 

• SME collateral-free loans: 

SME collateral-free loans are very similar to unsecured business loans. The lender does not require any collateral or personal guarantee, and the loan is granted based on the customer's profile which includes his income, age, credit history, and other such factors. It is accessible to SMEs at all times—be it as a start-up or during the existing stages—to help in purchasing machines, working capital, and other needs.
 

• Construction equipment loans: 

A construction equipment loan is used by businesses to purchase construction equipment such as cranes, skid steers, mixer trucks, loaders, excavators, and other machines. It is usually a secured commercial loan with the lender hypothecating the purchased equipment. Depending upon several conditions, the repayment period for such loans might range between one year and five years.
 

• SME credit card: 

Such types of credit cards are given to retail traders, tiny units, village industries, etc. The funds are utilised to meet businesses’ credit requirements including the purchase of a shop. The loan is provided either in cash credit or term loans. The repayment tenure of such loans ranges between three years and five years. 
 

• Commercial vehicle loans: 

This type of loan is granted to businesses for purchasing vehicles such as buses, trucks, tempo travellers, and other similar commercial vehicles. Commercial vehicle loans are very much similar to personal vehicle loans such as used car loans. The repayment period is likewise identical, ranging from one to five years.
 
               Also Read: Growing Your Business With Machinery Loan—It Is Easy!
 
Commercial loan process: 
A commercial loan approval process is similar to that of other loan products. You must meet certain eligibility requirements and have all of the relevant documentation before the loan is disbursed into your account. You can also use a commercial loan EMI calculator to calculate the commercial loan EMI beforehand and plan your monthly budget.
 
Commercial loans eligibility criteria: 
Different commercial loan companies have different sets of requirements for granting business commercial loans. The following are some of the most common requirements:
 

• Commercial loans in India are available to sole proprietors, private limited companies, partnership firms, public limited companies, and self-employed professionals. 

 

• Businesses must have a high annual turnover and a consistent revenue stream.

 

• The company must have been in operation for at least one year.

 

• The borrower must be an Indian national between the age group of 21 years and 65 years.

 
Documents required for the commercial loan approval process: 
 

• Copy of the PAN Card and a duly filled application form are mandatory.

 

• Business continuity proof such as trade licence, establishment certificates, sales tax certificate etc. 
   

• Income proof such as ITR, account statements, audited P&L statement, and balance sheet etc. 

 

• The lender may request a few more documents as necessary.

 
                              Also Read: All You Need To Know About Small Business Loans
 
To Conclude: 
Commercial loans are similar to business loans. The range of products offered under this category is also very much identical to what it is offered under the business loans category. However, before applying for this loan, make sure you review the qualifying requirements and compare commercial loan interest rates in India to make an informed decision.