What is a Commercial Loan?

Commercial loans are bank loans that are granted to different types of business entities. In some cases, the commercial loan is extended to assist a company with short term funding for basic operational functions, such as meeting payroll or purchasing supplies that are used in the production of the goods manufactured and sold by the company. At other times, the commercial loan may be utilized to purchase new machinery that is directly connected to the operation of the business.
The commercial loan is often thought of in terms of a short-term source of cash for a business. Some bankers offer a commercial loan format that is known as a renewable loan. Renewable loans allow the business to secure necessary funds, repay the balance within terms, and then roll the loan into a second or renewed period. This type of commercial loan is often employed when a company needs funds to secure resources to handle large seasonal orders from customers while still providing goods to other clients.
As with most types of loans, the credit worthiness of the applicant will play a major role in the securing of a commercial loan. The business normally must present documentation that proves the stable cash flow of the company, thus ensuring the lender that the loan can be repaid according to terms. If approved, the borrower can anticipate to pay a rate of interest that is in keeping with the prime lending rate.
One of the advantages to a commercial loan is that many banks offer these types of loans at very competitive rates of interest. Often, the rates will be lower than for other types of loans, especially asset-based loans. This means that the borrower will have a smaller amount to repay the lender.
As with all financial arrangements, local and national laws regarding the banking industry will dictate the structure and conditions associated with a commercial loan. Any company seeking a commercial loan would do well to work with the banking institution to evaluate the current working capital needs of the company and look at all possible loan solutions before making a formal application for the commercial loan.