Here’s What You Should Know About Commercial Loan In India
Are you anxious about meeting the expenditures of your newly founded venture? Commercial loans might look like the ultimate saviour in such cases. However, there are several kinds of commercial loans; understanding each is vital before you avail of the loan.
Remember, commercial and business loans can look similar, but they aren’t. Commercial loans have a more significant market and credit size compared to business loans.
What is a commercial loan?
Before venturing out, you must understand the terms, conditions, interest rates, and other details of commercial loans. A commercial loan is a loan availed of by small business firms. These loans are taken when they cannot raise revenue to meet current expenditures. Banks generally sanction these loans. The loan amount depends on the nature of the business and the credit score of the borrower.
Types of Commercial Loans
There are several types of commercial loans that have different parameters. They are designed for precise commercial requirements. Explore the various commercial loans to select the best one suitable for your business.
Banks overdraft
If your company needs immediate cash, there’s nothing more helpful than a bank overdraft facility. Borrowers can avail of this loan, even if they do not have any account balance. However, this does not imply you have no bar on loan. The predetermined amount set under this loan varies from person to person.
Most small business owners prefer this type of loan as it does not have a fixed EMI policy. Borrowers can pay off the debt as and when they have the funds without paying any prepayment penalty, as in other cases.
Term loans
It is possible that your money is stuck owing to some technical glitch or delayed by a few months. A term loan can help you fund your business operations during this period. Of course, availing of a long-term loan might be unnecessary if you are sure to receive the funds arriving in a few months.
Term loans are designed for users who need financial assistance for a specific time period, especially short ones. They are divided into short, medium, and long-term goals. The borrower has to pay off the principal amount and interest within a specific period.
Commercial mortgage loans
Commercial mortgage loans differ from typical mortgage loans, which require collateral. Instead, one can buy a real estate property using this kind of loan where the purchased property serves as the mortgage.
Collateral-free commercial loans
This is the best commercial loan in India, designed for small-scale businesses. The business owner does not need to mortgage any property to avail of this loan. Instead, they can pay off the debt and its interest within the stipulated period. Interest rates and predetermined loan limits depend on the borrower’s credit score, age, income profile, etc.
Eligibility criteria for commercial loans
While various financial institutions may have different eligibility criteria for availing specific commercial loans, the most standard ones are as follows-
- The borrowing individual must be between the age of 21 and 65.
- Individuals who are self-employed, private and public limited business firms, partnership ventures, and self-proprietors can avail of a commercial loan in India.
- The borrower must fulfil the income criteria set by the lending bank. The income criteria vary from one institution to another.
- The borrower’s firm must have enough turnover and a good credit score to be eligible for the loan.
How to secure a commercial loan?
The process of securing commercial loans may vary from lender to lender. However, while some lenders have more specific requirements, the general process is given below:
Pre-approval process
Before lending the required sum to borrowers, every bank conducts a pre-approval step. This step involves checking the borrower’s income and the nature of the business. Additionally, the bank will look at previous loans made by the borrower and their turnover. The pre-approval step ensures the borrower can repay the debt within a stipulated time.
Loan application process
Once you qualify for the pre-approval step, you must apply for a commercial loan. Borrowers are required to fill out and submit all required documents for commercial loans with all banks. These documents may include your identity proof, PAN card, and other documents required for the loan. You must fill up the loan application form cautiously to avoid errors. Remember, wrong details can cause the bank to reject your application.
Reviewing of loan application
Once you submit the loan application form, the loan officer will review your application. They will also verify your documents and check your credit score. Reviewing your loan application is one of the most significant steps in the process of securing a commercial loan.
Handing of term sheet
After the loan application and review are complete, the bank finally hands over a term sheet to the borrower. The term sheet is a formal official document that mentions the loan type, interest, tenure, and other details.
Benefits of commercial loans
Capital Access
Commercial loans offer instant financial relief to new startups. By securing a commercial loan, one can buy various equipment, maintain their payroll, and carry out other business operations.
Easy access to money
Commercial loans help you access and manage your finances seamlessly. While some small-scale business owners might try to secure their finances by investing in stocks, that might be risky. On the other hand, commercial loans can offer a safer and more straightforward way of arranging funds.
Disadvantages of commercial loans
Rigid terms and conditions
Commercial loans, unlike personal loans, have very strict terms and conditions. The owner has to specify the kind of activities they would fund through the loan and how they would pay it back. Thus, one can’t use it for any other purpose unless they specify them in the loan application process.
Time-consuming loan application process and paperwork
Commercial loan applications can be time-consuming and tedious. The loan application can take several days for acceptance or reviewal. Moreover, borrowers have to submit several documents that can make the loan application process complex.
Conclusion
Running a startup can be financially exhausting, especially if you do not have enough capital. However, that does not mean giving up on your entrepreneurial goals and aspirations. Instead, you can always avail of commercial loans to keep your business activities going. Piramal Finance can help you explore the various kinds of commercial loans, their types, and other features to help you gain greater clarity about them. Read more blogs on the website to get a clearer picture of commercial loans.