A commercial loan is a type of loan that is arranged between a financial institution and a business enterprise to fund any kind of business expense. These kinds of business expenses often fall outside the regular operational costs, so additional cash is needed to fund them.
Businesses use commercial loans for several reasons. One of them is to fund a capital expenditure. For example, if your business is looking to expand immediately because of a high demand for your product but you currently dont have the money to pay for an expansion, you can get this kind of loan to quickly fund your spending or to ensure that your operational costs are covered.
Another reason why businesses take on a commercial loan is to make sure that they are covered when large seasonal orders come in. Some businesses have certain times of the year where they need extra hands and extra equipment in order to keep up with seasonal orders. Take Christmas or Valentines for example. During these months, the sales of flowers and chocolates increase. If you are in the business of selling flower and candies, you might want to take advantage of the huge demand. In order to do so, you hire extra workers, buy more flowers and candies than usual and increase delivery by more than 100%. You can use a commercial loan so that you wont have to dip into your personal savings just to fund these expenditures.
Businesses also take on these kinds of loans to take advantage of different types of interest rates. Some banks offer fixed rate and flexible rates for a commercial loan that they dont offer with any other loans. So in order to get the best rate possible, business owners would consider this kind of loan over others.
The payment terms for a commercial loan is usually shorter than regular loans. They often dont drag on for decades unlike some loans and mortgages. The shortest term can be repaid within one year, while the longest can be 5 7 years depending on the financing institution. In some cases, it can go for longer but with additional conditions attached to the agreement such as changing the interest rate from fixed to flexible after 3 years.
Getting approved for a commercial loan will depend on whether you or your business is credit worthy. If you plan on getting one in the future, make sure to maintain a good credit standing and pay off your debts on time.