Economics
Commercial Loan
A commercial loan is a financial arrangement in which a business borrows money from a financial institution to fund its operations, expansion, or other business activities. These loans are typically used for capital expenditures, working capital, or to finance large projects. Commercial loans often have specific terms and conditions, such as interest rates and repayment schedules, tailored to the needs of the borrowing business.
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4 Key excerpts on "Commercial Loan"
eBook - PDF- Jeff Madura(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
These so-called lender liability suits have been especially prevalent in the farming, grocery, clothing, and oil industries. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 17: Commercial Bank Operations 453 Volume of Business Loans The volume of business loans provided by commercial banks changes over time in response to economic conditions. When the economy is strong, businesses are more willing to finance expansion. When economic conditions are weak, businesses defer expansion plans and, therefore, do not need as much financing. As an example, economic growth increased during the 2004–2006 period, resulting in a major increase in business loans provided by banks. In contrast, during the credit crisis of 2008–2009, the volume of business loans decreased. Types of Consumer Loans Commercial banks may provide individuals with installment loans to finance purchases of cars and household products. These loans require the borrowers to make periodic payments over time. Banks may also provide credit cards to consumers. Credit card holders are assigned a maximum limit based on their income and credit history, and a fixed annual fee may be charged to maintain the account. This service often involves an agreement with VISA or MasterCard. If consumers pay off the balance each month, they usually are not charged interest. Bank rates on credit card balances are sometimes nearly double the rate charged on business loans.
- Leonard D. DuBoff, Amanda Bryan(Authors)
- 2019(Publication Date)
- Allworth(Publisher)
Intermediate-term loans, which require payment in between one and five years, and long-term loans, which extend payments over ten or even fifteen years, are more appropriate for purchases of fixed assets. Repayment on the loans is expected to be made not from the sale of these assets but from the earnings generated by the company’s ongoing use of them. Those assets produce income at a much slower rate, hence the bank’s willingness to allow repayment over a longer period. Bear in mind that commercial lenders are interested in offering funds to successful businesses in need of additional capital to expand and increase profitability. They are not particularly inclined to make loans to businesses that need the money to pay off existing debts.Depending upon your credit reputation, short-term loans may be available with or without security. It is more likely that long-term loans will require adequate security (which may include securing the asset to be acquired) and necessitate a pledge of personal, as well as business, assets.Loans that are characterized as lines of credit basically provide the business with the opportunity to borrow up to a specified amount at any given time. This can be used to facilitate purchases, help pay salaries when the business is experiencing cash flow problems, or the like. A line of credit is typically available on a long-term basis. Most lenders require the line to be paid off at least once a year, even though the money can be borrowed again immediately thereafter.The term of the loan is an important legal obligation that your business will accept and could include modifications that restrict early payoff or trigger termination upon a certain event. Considerations of this kind could entice a financial institution to accept a certain payment term, but it is important that you understand what each proposed modification may mean for your business.REPAYMENTWhen and how the loan will be repaid is closely associated with the questions of how much money is needed and for what purpose. The banker will use judgment and professional experience to assess your business ability and the likelihood of your future success. The banker will want to know whether or not the proposed use of the borrowed funds justifies the repayment schedule requested. As the borrower, you must be able to demonstrate that the cash flow anticipated from the proceeds of the loan will be adequate to meet the repayment terms if the loan is granted. As mentioned above, repayment may be restricted or triggered by certain events. Contemplating a provision of this kind may be a useful negotiating tool, but if you propose such a term, be prepared to demonstrate how the business will deal with such an event.
eBook - PDF- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
With a fixed‐rate loan, the bank assumes all of the interest rate risk. Borrowers shift to floating‐ rate loans, however, if they are offered sufficient inducement in the form of a lower initial interest rate on the floating‐rate loan. COMMERCIAL AND INDUSTRIAL LOANS As shown in Exhibit 13.7, loans to commercial and industrial firms constitute 12 percent of total assets. Most are short‐term loans with maturities of less than 1 year. The type of loans made by a bank reflects the composition of the bank’s customers. Consequently, business lending is typically more important to large banks than to small retail banks. There are three basic types of business loans, depending on the borrower’s need for funds and source of repayment. A bridge loan supplies cash for a specific transaction with repayment coming from an identifiable cash flow. Usually, the purpose of the loan and the source of repayment are related; hence, the term bridge loan. For example, an advertising company enters into a contract to produce a TV commercial for the Ford Motor Company. The total contract is for $850,000; however, the advertising company needs approximately $400,000 in financing to produce the commercial. The loan is a bridge loan because it sup- ports a specific transaction (making the commercial) and the source of repayment is identifi- able (completing the commercial). A seasonal loan provides term financing to take care of temporary discrepancies between business revenues and expenses that are the result of the manufacturing or sales cycle of a business. For example, a retail business may borrow money to build inventory in anticipation of heavy Christmas sales and may expect to repay it after the new year begins. The uncertainty in this type of loan is whether the inventory can be sold for a price that covers the loan. Long‐term asset loans are loans that finance the acquisition of an asset or assets.
- Leonard D. DuBoff, Rudolph Lopez(Authors)
- 2022(Publication Date)
- Allworth(Publisher)
Once the bank has evaluated your creditworthiness and that of your business, you should be ready to explain the appropriateness of the kind of loan requested. It is important to be able to convince the lender that your proposed use of the borrowed money will generate the additional revenue needed to pay the loan during the agreed repayment period. The purpose of the loan will determine what type of loan—long- or short-term—the applicant should request.TERM OF LOANLoans needed to purchase inventory, especially where the applicant’s business is highly seasonal, will generally be short-term loans requiring repayment within one year or less. This is because the bank will likely anticipate repayment from the sale of the assets financed by the loan.Intermediate-term loans, which require payment in between one and five years, and long-term loans, which extend payments over ten or even fifteen years, are more appropriate for purchases of fixed assets. Repayment on the loans is expected to be made not from the sale of these assets but from the earnings generated by the company’s ongoing use of them. Those assets produce income at a much slower rate, hence the bank’s willingness to allow repayment over a longer period. Bear in mind that commercial lenders are interested in offering funds to successful businesses in need of additional capital to expand and increase profitability. They are not particularly inclined to make loans to businesses that need the money to pay off existing debts.Depending upon your credit reputation, short-term loans may be available with or without security. It is more likely that long-term loans will require adequate security (which may include securing the asset to be acquired) and necessitate a pledge of personal, as well as business, assets.Loans that are characterized as lines of credit basically provide the business with the opportunity to borrow up to a specified amount at any given time. This can be used to facilitate purchases, help pay salaries when the business is experiencing cash flow problems, or the like. A line of credit is typically available on a long-term basis. Most lenders require the line to be paid off at least once a year, even though the money can be borrowed again immediately thereafter.
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