What is a commercial loan?
A commercial loan is a financial instrument that businesses owners can avail of to address any short-term capital needs. The sanctioned amount can be used to increase the working capital, acquire new machinery, build new infrastructure, meet operational costs, and other such expenditures. Since these are relatively short-term loans, they can be both secured and unsecured.
Bajaj Finserv offers commercial loans up to Rs. 80 lakh with competitive interest rates and Flexi facilities that make managing cash flows easier. These loans have simple eligibility criteria and a minimal requirement for documentation, making it very easy to avail. To simplify the borrowing experience, you can also apply for a commercial loan online.
How commercial loans work
Commercial loans are provided to various types of businesses to support their financial needs, often for short-term purposes. These may include covering day-to-day operational expenses, purchasing equipment, or managing essential costs such as payroll and raw material procurement.
In many cases, lenders require businesses to offer collateral to secure the loan. This collateral typically includes assets like property, machinery, or equipment, which the lender can claim if the borrower defaults or declares bankruptcy. In some instances, projected cash flow from accounts receivable may also serve as collateral. One common example of a commercial loan is a mortgage taken for commercial real estate acquisition.
Benefits of commercial loans
Commercial loans are designed to meet the financial needs of businesses rather than individuals. They offer flexible funding options tailored to support business operations and growth.
Term-based classification: These loans are offered in different tenures—short-term (less than 12 months), medium-term (12 to 36 months), and long-term (beyond 36 months), depending on the borrower’s financial requirements.
Secured and unsecured options: Businesses can choose between secured loans, which require collateral, and unsecured loans, which do not. Secured loans typically carry lower interest rates due to the reduced risk for lenders.
Fixed or floating interest rates: Commercial loans come with the option of fixed rates, which remain constant throughout the loan tenure, or floating rates, which vary based on prevailing market conditions.
Purpose-specific usage: These loans are extended to businesses for various needs such as managing working capital, covering operational expenses, acquiring equipment, or funding expansion plans.
Exclusively for business entities: Unlike personal loans, commercial loans are strictly offered to registered business organisations and not to individual customers.
Easy accessibility and quick disbursal: Many financial institutions now offer streamlined application processes with faster disbursal timelines, making it convenient for businesses to access funds promptly.
Flexible usage and credit improvement: Apart from addressing immediate capital needs, responsibly managed commercial loans can help improve a company’s credit profile, aiding future borrowing capacity.
To know your options, check your business loan eligibility and secure quick funds now.
Different types of commercial loans
Businesses have access to a variety of loan options tailored to suit different financial needs. Below are some of the most widely used commercial loan types:
Lines of Credit
A line of credit (LOC) is ideal for businesses that operate on credit terms and need ongoing access to working capital. It allows firms to borrow up to a specified limit and repay as needed without a fixed repayment schedule. The loan amount can fluctuate based on changes in receivables, inventory, and other working capital accounts.
Term Loans
Term loans are commonly used to purchase long-term assets such as machinery, furniture, or vehicles. These loans follow an agreed repayment schedule with regular instalments, often monthly. The repayment duration is generally matched to the asset's useful life, ensuring the loan is fully repaid by the time the asset is retired.
Capital Leases
Capital leases, also known as finance leases, are used to finance equipment and other fixed assets. Unlike term loans, the leasing company retains ownership of the asset during the lease term. This structure allows businesses to use the asset while spreading the cost over a defined period, without immediately acquiring legal title.
Commercial Mortgages
Commercial mortgages are term loans designed specifically for purchasing or refinancing commercial property. These loans vary in structure depending on whether the property is owner-occupied or income-generating. They typically offer longer repayment periods, competitive interest rates, and higher loan-to-value (LTV) ratios compared to other commercial loan types.
Acquisition Loans
Acquisition loans are used when a business intends to purchase another company or a specific division of a business. These loans focus on funding business ownership transfers rather than buying physical assets. Generally, acquisition loans feature shorter repayment terms and lower LTV ratios, depending on the size and risk of the acquisition.
If you want to expedite your financing process, check your pre-approved business loan offers to secure funds quickly.
Differences between commercial and business loans
While both commercial and business loans offer financial support to enterprises, they differ in terms of eligibility, purpose, and structure. The table below outlines the main distinctions:
Aspect |
Commercial Loan |
Business Loan |
Borrower |
Typically used by large corporations, real estate firms, or well-established companies |
Intended for small to medium-sized enterprises, startups, and individual proprietors |
Purpose |
Designed for high-value needs like expansions, acquisitions, or property investment |
Meant for operational needs such as inventory, payroll, or equipment purchase |
Risk Assessment |
Evaluated based on company financials, credit rating, income streams, and asset value |
Assessed based on business and personal credit history, cash flow, and business plan |
Approval Process |
Involves a detailed and longer process due to high loan values and regulatory checks |
Generally quicker and simpler, with automated approvals in some cases |
Collateral Requirement |
Usually requires high-value security like real estate or equipment |
May require minimal or flexible collateral such as receivables or inventory |
Interest Rates |
Lower interest rates, reflecting lower risk and stronger borrower profiles |
Higher interest rates to balance lender risk, especially for new or unproven businesses |
Loan Amounts |
Offers large sums, from several lakhs to multi-crore financing |
Typically smaller ticket sizes, often between Rs. 3 lakh and Rs. 1 crore |
Repayment Terms |
Longer durations, generally between 5 to 25 years |
Shorter tenure, usually 1 to 5 years, depending on loan use and lender terms |
Conclusion
Commercial loans are vital for supporting business growth, asset acquisition, and daily operations. Whether you're expanding or managing cash flow, choosing the right loan type ensures financial stability. You can also apply for business loan online for a quick and convenient experience.
Frequently asked questions
A commercial loan is a type of financing offered to businesses to help cover expenses such as working capital, equipment, property purchase, or expansion.
Unlike regular personal loans, commercial loans are structured for business purposes and typically involve larger loan amounts, higher collateral requirements, and tailored repayment terms.
Partnership firms, sole proprietorships, private limited companies, and other registered business entities with a good turnover and financial history are eligible.
