Small business loans are short-term loans availed by companies that are seeking to raise some capital for meeting expenditures related to daily operations, equipment maintenance and purchase, raw material purchase, expansion or upgradation of business, research and development, etc. Commercial loans can provide a business with the finance that it needs for smoothly going through the initial phases of starting a business. Commercial loans are usually for a very short duration. Many businesses find it difficult to apply for a secured loan, due to regulatory restrictions and costly upfront fees. Hence, commercial loans, term loans, line of credit and other unsecured loans help these businesses to gather adequate finances for meeting their requirements.
How you can use Commercial Loans
In the last few years, commercial loans have transformed themselves from fulfilling short-term financial needs to the management of payroll and purchasing smaller supplies too. To meet the overall expenses of a business, regardless of a season of huge sales, preferred festivals or changing patterns of consumer behavior – commercial loans always rise to the occasion to meet every type of business needs.
Commercial loans can either be repaid in a defined time limit or a tenure that is chosen by the borrower as per his/her needs. It is usually collateral-free financing and is offered with flexible repayment options. However, a borrower must pay the loan amount completely with the interest accrued in the specified tenure on time to avoid loan default and damage to his/her credit score.
Also Read: Corporate Loan, Working Capital Loan
Eligibility for Applying for Small Business Financing
Annual Revenue
When applying for a loan, annual revenue is the most significant factor which would define your eligibility for availing the loan. The reason behind it is that lenders want to be sure about a business having enough incoming cash so that the borrower can repay the borrowed amount easily. For the verification of your annual revenue, you would have to produce the Profit and Loss statements and all the related tax returns.
Bank Balance
Even after impressive sale numbers, a lower bank balance can become a hindrance in maintaining the appropriate business funding and being able to repay the full loan amount on time. Hence, it is a good practice to maintain an average bank balance. At least three months of the operating expenses which includes the amount of loan is the average bank balance that should be maintained.
Duration of Business
An established company having more experience in business is a safer option for lenders to invest. Records show that only half of the small businesses go up to 5 years of business. While seeking a term loan, you must be in the business for at least 2 years.
Credit Score
While a small business loan goes through the underwriting process, a well-maintained credit score is one of the most crucial factors. If you are able to manage your personal finances well that means you are able to manage your business-related finances well too. If you are not in business for many years, a good credit score which is dependent on utilizing credit, delayed payments, etc. – is a good factor for being eligible.
Check: Latest Business Loan Interest Rates
Benefits of Commercial Loans
Expanding of Business
Small businesses which have a business model already established with a decent history of transactions can avail the commercial loans to prepare themselves for their next phase of business expansion. Whether they want to expand it across new locations or reach out to the new target audience, these loans would help them make their operations smooth.
New Technology and Tools
Small businesses that are looking to purchase new equipment and machinery for carrying out their operations can avail the equipment loan. Banks offer commercial loans especially for purchasing new and costlier equipment which can help businesses in increasing their productivity and giving them a competitive edge.
Managing Inventory
When taking up big business orders, especially of manufacturing companies, companies require readily usable raw materials. Commercial loans can prove to be beneficial in such situations and help businesses to buy essential inventory at right time.
Raising Working Capital
Maintaining a working capital is crucial to meet all the daily requirements of cash and expenditures to be able to sustain in the market. Commercial loans help in making a perfect balance between keeping liquid cash for daily operations and meeting unforeseen expenditures.
Also Read: Popular Funding Options to Raise Capital for Small Businesses
How to Choose the Right Commercial Loan
It is generally considered by many businesses that availing a lower small business financing loan would be the best option to choose – given that, they are easily repaid back. Even though term loans are low-cost, they can be difficult to be chosen by small businesses. This is because the process of applying for these loans takes a long time. Hence, decide on what amount would you need to borrow. This will depend on how many years you have been in business for, yearly turnover, daily operating expenses and other unforeseen expenses.
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