Types of Commercial Loans
Types of Commercial Loans
- Term Loan
- Bank Overdraft Facility
- Letter of Credit
- Bank Guarantee
- Lease Finance
- SME Collateral free loan
- Construction Equipment loans
- SME Credit Card
- Commercial Vehicle Loans
A term loan is simply a loan provided for business purposes that needs to be paid back within a specified time frame. It typically carries a fixed interest rate, monthly or quarterly repayment schedule - and includes a set maturity date. Term loans can be both secure (i.e. some collateral is provided) and unsecured. A secured term loan will usually have a lower interest rate than an unsecured one. Depending upon the repayment period this loan type is classified as under:
- Short term loan: Repayment period less than 1 year.
- Medium term loan: Repayment period between 1 to 3 years.
- Long term loan: Repayment period above 3 years.
A Bank Overdraft Facility refers to the ability to draw funds greater than are available in the company's current account. The actual size of the facility and the interest to be paid on overdrafts is typically agreed to prior to sanction. An overdraft facility is considered as a source of short term funding as it can be covered with the next deposit.
A letter of credit is a document issued by a financial institution assuring payment to a seller provided certain documents have been presented to the bank. This ensures the payment will be made as long as the services are performed (usually the dispatch of goods). Hence, a Letter of Credit serves as a guarantee to the seller that he or she will be paid as agreed. It is often used in trade financing when goods are sold to overseas customers or the trading parties are not well known to each other.
A bank guarantee is a 'letter of guarantee' issued by a bank on behalf of its customer, to a third party (the beneficiary) guaranteeing that certain sum of money shall be paid by the bank to the third party within its validity period on presentation of the letter of guarantee. A letter of guarantee usually sets out certain conditions under which the guarantee can be invoked. Unlike a line of credit, the sum is only paid if the opposing party does not fulfil the stipulated obligations under the contract. A bank guarantee is usually used to insure a buyer or seller from loss or damage due to non-performance by the other party in a contract.
Lease Financing is a modern financing method that allows individuals or companies to own and make use of certain assets for medium to long term financing periods in return for previously - set interim payments. The lessor, who is the finance company, purchases the assets and becomes its legal owner. At the conclusion of the leasing period, the lessor would have recovered a large portion (or all) of the initial cost of the identified asset, in addition to interest earned from the rentals or installments paid by the lessee. The lessee also has the option to acquire ownership of the identified asset by, for example, paying the final rental or installment, or by bargaining a final purchase price with the lessor. Throughout the duration of the leasing period, the lessor (finance company) remains the legal owner of the asset. However, the lessee has control over the asset, and makes use of it as required.
This is usually a business loan offered to SMEs and are collateral-free or without third party guarantee. Here the borrower is not required to provide collateral to avail the loan. It is made available to SMEs in both the start-up as well as existent phases to serve working capital requirements, purchase of machines, support expansion plans. However, it is to be noted that small businesses involved in retail trade are not eligible for these type of loans.
Construction Equipment loans are provided for purchase of both new and used equipment like excavators, backhoe loaders, cranes, higher end construction equipments etc. The tenure of such loans vary from 12 to 60 months depending upon the deal and nature of repayment capacity. This is usually a secured loan where the machine itself is hypothecated until the loan is repaid.
A SME Credit Card is a loan type that is made available either in Cash Credit or in Term Loan - type, the quantum of credit being up to 10 lakhs.
This loan facility can be used by small industrial units, small retail trader, small business enterprises and transport traders. The repayment period for Term Loans is 5 years and 3 years for Cash Credit.
Commercial Vehicle Loans enables a borrower to purchase vehicles like trucks, buses, tippers, light commercial vehicles. The tenure of such loans vary from 12 to 60 months depending upon the deal and nature of repayment capacity.
This loan facility is provided to companies with more than two years of business experience, existing owners of at least two commercial vehicles, captive customers and transporters.
It is important to note that these are only general descriptions. Lenders have their specific loan evaluation and documentation criteria before a lending decision is taken.