33. Commercial bank services: commercial loans.

commercial loan -loan advanced to a business instead of to a consumer. Commercial loans are usually for a short-term (from 30 days to one year), secured (backed by a collateral) or unsecured, and are often advanced for financing equipment, machinery, or inventory. Banks usually require the commercial borrowers to submit monthly and annual financial statements, and to maintain insurance cover on the financed item.

A commercial loan, also commonly called a business loan, a commercial and industrial loan, or a C&I loan, represents an important line of business for the banking industry and a key source of funds for the business sector. Commercial and industrial lending is a major line of business for many banking firms as they provide credit for a wide array of business purposes — from inventory financing to investments in equipment — across a wide array of industry sectors, ranging from retail trade to manufacturing. Likewise, commercial loans from banks represent an important source of funding for corporations, partnerships, and sole proprietorships that make up the business sector.

A debt-based funding arrangement that a business can set up with a financial institution. The proceeds of commercial loans may be used to fund large capital expenditures and/or operations that a business may otherwise be unable to afford.

Due to expensive upfront costs and regulation related hurdles, smaller businesses do not typically have direct access to the debt and equity markets for financing purposes. Therefore, they must rely on financial institutions to meet their financing needs. Similar to consumer credit, businesses have a variety of lending products to choose from. A line of credit, term loans and unsecured loans are just a few examples. However, small businesses should shop around at different institutions to determine which lender offers the best terms for the loan.

Businesses require an adequate amount of capital to fund startup expenses or pay for expansions. As such, companies take out business loans to gain the financial assistance they need. A business loan is debt that the company is obligated to repay according to the loan’s terms and conditions. According to the U.S. Small Business Administration, before approaching a lender for a loan, it is imperative for the business owners to understand how loans work and what the lender will want to see from the owner.

Function

A business loan is borrowed capital that companies apply toward expenses that they are unable to pay for themselves. Some business owners use business loans to pay for salaries and wages until their new company gets off the ground, while other companies put borrowed funds toward office supplies, inventory or business projects. Lenders want to know how the business intends to use the borrowed monies, so business owners must make sure to have a clear outline for how the money will be spent. According to an October 2010 article by David Bangs in Entrepreneur.com, it is important to impress the lenders by being professional, or they may decline the loan application.

Features

Loans are not given out for free. Lenders charge interest on loans as the price paid for borrowing the money. It is important to know whether the interest is fixed or variable. A fixed interest rate means that the interest rate remains the same for the duration of the loan and its payback period. A variable interest rate indicates that the interest rate can fluctuate based on a variety of determinants. Other features of a loan to pay attention to are the payback period (months or years) and what the lender will use as collateral if the business is unable to pay the loan back timely.

Significance

Business loans allow companies to have a chance at success. As such, loans are in high demand, but not every company that applies for a loan will receive one. When applying for a business loan, lenders evaluate the company’s history, the amount of debt the company has and whether the business seems risky. Risky businesses, such as startup companies, are often not the winning recipients of traditional loans.

Considerations