With the changing dynamics of the business world, every organization is not just aiming for survival; expansion is also on the tasks list of many businesses. With this competition on the rise, companies must grab the opportunity at the right time with the required resources, one being financial resources. Companies seek funding for daily operations, expansion and sustenance; these funds are generally generated through loans or credit facilities.
The market for loans in India is diverse, depending on the purpose of the loan. So, to get the proper funding for the business, it becomes essential to analyze the different types of loans before applying for them. In the business world, commercial loans and business loans are used by many. But are these the same? Or is there a difference between the two? Let's find out.
What Are Commercial Loans?
A commercial loan is a short-term loan intended to boost a business's working capital and cover significant expenses and operating costs. When small firms need money but cannot afford to raise it through the stock and bond markets, they opt for this type of financing.
Banks (or a group of banks) and other financial institutions approve commercial loans against collateral based on the borrower's financial standing and credit rating. Companies can utilize commercial loans for the following-
Equipment Acquisition:
Commercial loans can provide the necessary funds for purchasing equipment, be it heavy machinery or office PCs. The purchased equipment can serve as collateral without the need for additional security.
Business Expansion:
Established companies looking to expand into new markets or geographical areas can rely on commercial loans for the next growth stage.
Working Capital:
A commercial loan can help offset the adverse financial consequences if a company faces difficulties in maintaining working capital.
Building Credit Profile:
Small businesses often need help to secure substantial loans due to their limited credit profile. These businesses can opt for small commercial loans to establish a good credit history.
Types Of Commercial and Business Loans:
Loan options provide businesses various avenues to secure the necessary funds for their operations and growth. Understanding the features and requirements of each loan type is crucial in selecting the most suitable option for a business's specific needs. Financial institutes offer the following types of commercial and business loans-
Construction Equipment Loan:
For businesses needing expensive construction equipment, this loan allows the purchase of equipment, with the bank having the right to seize it in case of default.
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Term Loan:
It is a loan with a fixed or variable interest rate to be repaid within a specified time frame, offering fewer restrictions on usage. Depending on the collateral provided, it can be a secured or unsecured term loan.
Commercial Vehicle Loan:
It is curated for purchasing business vehicles, with the purchased vehicles serving as collateral. The repayment period typically ranges from one to five years.
SME Credit Card:
It is a loan option for retail traders, village industries and tiny units, lasting three to five years. It can be in the form of cash credit or term loans, without the need for collateral.
Bank Overdraft Facility:
Allows withdrawal of funds exceeding the available balance in the company's current account. It is a short-term loan with predetermined terms and conditions.
Letter Of Credit:
It is a document issued by a financial institution guaranteeing payment from a buyer to a seller upon the presentation of specified documents. The bank pays the outstanding balance if the buyer fails to make payment.
Bank Guarantee:
The lender ensures that a debtor's liabilities are met, enabling businesses to purchase goods and services they otherwise couldn't.
How Does A Commercial Loan Differ From A Business Loan?
Commercial and business loans are the same: a company borrows funds from a lender to cover costs. Though these terms are often used synonymously, there is a thin line of difference between the two.
The term "commercial loan" refers to the services focused towards larger firms. These loans are often offered in larger amounts and frequently demand tangible security. They also require stricter qualifications and longer, more complex applications. The commercial loan interest rates range from 9-21% depending on different lenders' eligibility criteria and terms.
On the other hand, financing intended for smaller businesses is referred to as a "business loan" or "small-business loan." These products typically come in lesser quantities than commercial loans and could have more flexible credit terms.
Conclusion:
Achieving business success requires a good idea, a target market, and access to funds. Positive cash flow through commercial and business loans can fuel growth and accomplish great things. However, consider factors like interest rates, credit score, and fees before choosing the right loan for your company. And if you are looking for trustworthy lenders that offer transparency in all the associated charges, connect with IIFL Finance, where you can get end-to-end assistance in completing the loan procedure with ease.
