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Home General Top Important Types of Commercial Loans

Top Important Types of Commercial Loans

The commercial loans are always a short term financial tool that every company avails in certain situations for funding all their unexpected operation costs and their capital expenditures. At the initial stages of a business, there will be various opportunities for the growth of business and capital will ensure the materialisation of those opportunities.

A company which progresses has many expenses. A commercial loan can always be an excellent source for the support of your business. In the past few years, commercial loans have shaped from not just fulfilling short term needs to payroll management as well as smaller suppliers too.

The overall expenses of a business, festivals, behaviour of consumers, and season of huge sales are all taken care of by the commercial loans to meet every business needs. It is finance which has no collateral and comes with flexible repayment options.

list of a few types of commercial loans

SME loan

These are the business loans which are offered to the SMEs and are always free of collateral as well as without the third party guarantee. The borrower has no need to give any collateral for the availing of the loan. The availability is made to all SMEs, especially the start-ups as well as the existing phases for the working capital requirements, equipment purchases, expanding the plant and many more. The small businesses that are not involved in the retail trade are not eligible for the availing of these loans.

Construction Equipment Loans

These loans are best suited for purchase of new as well as the used equipment like the cranes, backhoe loaders, excavators and also higher-end construction equipment. The tenure period for these loans varies from 12 to 60 months approximately. The tenure depends upon the nature of the capacity of repayment. These loans are very secured as the machine purchased under these loans act as security and hypothecated unless the loan is repaid fully.

Commercial Vehicle loans

Commercial Vehicle loans always enable a borrower in the purchase of vehicles such as buses, trucks, tippers as well as the light commercial vehicles. The tenure period of such loans varies from 12 to 60 months which depends upon the nature of repayment capacity. The companies which have more than two years of business experience, captive customers, transporters as well as the existing owners of minimum two commercial vehicles can avail of these loans.

SME credit card

A SME credit card is usually made available with the cash credit or in the term loan based on the amount of credit. These loans are used by the smaller industrial units, small business enterprises, transport traders as well as the small retail traders. The repayment period for these term loans is five years and three years for the cash credit.

Term Loans

Term loans are the loans which are meant for business purposes and are always repaid within a particular time frame. There is a fixed rate of interest as well as a flexible repayment schedule. They are very secure and includes a maturity rate. As there is collateral, they are incredibly safe loans. A secured loan will always have lower interest rates when compared to a secured loan. Based on the terms they can be differentiated as short term, medium-term and long term loans.

Short term loans have a repayment period of less than a year. Medium-term loans have a repayment period between one to three years. Long term loans have a repayment period for above three years.

Bank overdraft facility

This refers to the capability in drawing funds which are higher than the current account of the company. The size of the facility and interest is to be paid for the overdrafts is agreed for the sanction. The overdraft facility is seen as a source of every short term funding, and it can also be covered with the next deposit.

Letter of credit

A letter of credit is a document that is issued by a financial institution that assures payment to a seller when a particular set of documents are submitted to the bank. This will ensure that the payment is made as long as the services are performed. Letter of credit usually acts as a guarantee to the seller stating that the payment will be made as agreed. It is mostly used in trade financing as the goods are sold to the customers in the overseas. Sometimes it happens with the trading parties that are not well known to each other.

Bank guarantee 

A bank guarantee is a letter of guidance that is issued by a bank on behalf of its customers to a third party guaranteeing a certain amount of money to be paid by the bank to the third party before the end of the validity period on the presentation of the letter of guarantee. The letter of guarantee sets certain conditions within which the guarantee can be requested. The sum is paid only if the opposing party fails to fulfil the obligations and terms as per the contract. The bank guarantee is needed for insurance of buyer or seller from any loss or damage that can happen due to the lack of performance by any other party in the contract.

Lease Finance

The lease financing is the modern financing which allows the individuals as well as the companies to own and make use of the certain assets for medium and also long term financing period in return for the interim payments. The finance company is the lessor who purchases the asset and also becomes the legal owner. When the lease period is about to end, the lessor will have recovered a large portion of the initial cost of the asset which is in addition to the instalments that repaid by the lessee. In some cases, the lessee can also try to acquire the ownership of the asset by making the final rent payment or instalment or by even bargaining the final purchase price with the lessor. All throughout the period of the lease, the lessee, which is the finance company, will remain the legal owner of the asset. The lessee can have control of the asset and also make use of it when required.

Although these are the types of commercial loans in general, it is always advisable to understand the loans completely before availing them as there are many terms and conditions in them. They vary from a lender to another and have different documentation or approval process. One has to do homework with the financial institutions in the market to know which loan is suitable for their respective business needs.

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