There is a tremendous amount of investment required for procuring heavy equipment, supplies and purchasing or leasing commercial properties for the smooth functioning of the business. The idea of bootstrapping such a significant expense is not a practical thing, especially as an investor in our country. You might need to acquire certain external funding in the form of commercial business loans from certain lenders like private lending institutions or banks.
The most common and practical funding approach that new and existing businesses settle on is commercial loans. However, it is vital to question whether it is the right option. To help you make the right decision, in the forthcoming sections, we have provided the benefits and loopholes of commercial business loans in the financial sector.
Let’s get started.
Benefits of Commercial Loans for Financial Sector
Myriad of Loan Options Available
This is perhaps the most significant factor that encourages business people to access this kind of loan. Commercial loans from different lenders are available in a variety of product ranges. This way, it suits the requirements of different countries and businesses to meet diverse budgets and requirements.
A commercial loan can be divided into two categories:
These types of loans provide capital support to the financial business during a monthly or cyclical period.
Lines of Credit
These types of loans support the ongoing working capital requirements of the business increasing equipment, inventory or cash flow for the operation.
Flexible Repayment Options
Due to the volatility of the business environment, it can be challenging to repay loans for certain investors. Certain institutions may ask the borrowers to repay the total payback amount, including the upfront loan amount and the interest. This may make the investors jittery, mainly due to the fluctuating interest rates. This is where commercial loans become favourable as there are different repayment alternatives that businesses can take advantage of. If your business is going through a cash crunch situation, acquiring commercial loans can give you some relief.
Generally, it has been observed that commercial loans come with a slightly low-interest rate in comparison to other loan facilities. Banks usually provide a favourable interest rate for commercial loans. The only problem is that these bank loans involve an intricate application process that makes it extremely difficult for businesspeople to acquire it.
Quick Processing of Funds
As long as an investor has the required information, it becomes possible to process the loan quickly. The lenders consist of professionals who advise investors about their borrowing capacity within minimal time. However, do not forget to provide the following information to the lenders while applying for a commercial loan:
Business type information
How long the business has been trading for
Accounting information (BAS / financials)
Bank account details
Loan purpose statement
Now, that you have looked at some of the benefits of commercial loans, it is time to divert your attention to its loopholes.
Loopholes of Commercial Loans for Financial Sector
Secured Loans are Favoured by major institutions
Established businesses may find it easier to gain early approval on secured loans from banks, SMEs and find it more difficult to struggle. This is simply based on the major lending appetite at the time This makes it very difficult for SMEs to access loans if property is not owned, or, the business operators are not willing to take such a risk. It is essential to note that if a business person defaults repayment of the secured commercial loan, a bank has all the rights to sell the commercial property held by the business. Whilst the pricing (interest rate) may be lower, the risk to the owner is very, very high.
Established Businesses vs new Business
Most of the lenders who wish to give commercial loans to businesses make sure that there is appropriate profitability, proven operating track record and above average credit history. This is where established businesses may get to the front of the line however, if you are a startup, it would become difficult to acquire the loan especially with the stringent measures. A contract for works, or, proof of new business may usually be required here.
Lenders will scrutinise the trustworthiness and credibility of the investor to ensure that they are capable of repaying the loan. Hence, proof of time in industry, bank statements, support from your accountant, strong, accurate invoices and trading history will increase your chances of obtaining such a loan.
There is No Guaranteed Business Improvement
There are times when you opt-out of the commercial loan if you find out it does not offer value for money. Also, remember that most of the lenders will approve only 70 to 85% of the loan amount, so even before obtaining the loan, a significant cash injection may be required. If you are an SME, it is wise to acquire a small loan amount based on your actual financials at an initial stage and then increase after that. Otherwise, this loan can become a liability with accumulating interest that brings about struggles when not managed properly.
SMEs traditionally Lack Choice
While the commercial lending mechanism might seem enormous, SME business lending is quite different, and this is the reason due to which commercial loans may not satisfy it. They require hard assets, minimum of 1-2 years’ experience and strong flawless credit rating, which makes it extremely difficult for SMEs to acquire commercial loans to finance their properties. Due to these criteria, SMEs have limited opportunities to acquire commercial loans. On top of that, the online pre-qualification measures put in by the lenders make it more challenging to obtain the loan.
To increase the options available, SMEs can investigate supply chain, invoice finance and line of credit. These facilities can provide a buy now pay later option, as well as only being required to pay interest on the amount of money you have used, rather than the total loan amount.
Cumbersome Application Process
Banks and other financial institutions have a strict application process that can prove to be exhaustive for the investors. Typically, they would be required to provide precise projected revenues assessment, associated business risk and business financial report comprehensively. Banks and other financial institutions usually require these kinds of information so that there is a low-risk period. However, this condition can harm certain genuine businesses that may not fully comply.
The time associated with the application process can often affect the opportunity a small / medium sized business has on offer over a short window of time. Business owners should learn to understand the time between assessment and formal approval before committing.
Most investors prefer commercial loans to finance businesses. The reason being, they are assessed by commercially minded individuals, faster turnaround times, contains and long-term pay-ability. However, there is a lot of financial information that needs to be provided to get the loan. Secure loans pose a higher financial risk in case of default than unsecured loans. Therefore, while considering the benefits of commercial loan, it is also imperative to keep other options in mind as well as seeking guidance from your accountant, financial planner while making the financial decision.
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