Definition§
A commercial loan is a type of short-term financing, typically 90 days, which is renewable. It is intended to cover the seasonal working capital requirements of businesses. This type of loan helps in managing the purchase of inventory, production, and distribution of goods by providing necessary funds for these operational activities.
Examples§
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Inventory Purchase: A retail business might take out a commercial loan to purchase bulk inventory for the holiday season, with the expectation of paying back the loan once the inventory is sold.
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Production Costs: A manufacturing company might secure a commercial loan to cover the costs of producing a large order, which will be repaid after the order is delivered and payment is received.
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Agricultural Needs: A farm could use a commercial loan to finance the planting and harvesting of crops, which will be paid back after the season’s produce is sold.
Frequently Asked Questions§
What is the typical duration of a commercial loan?§
Commercial loans are typically short-term, often around 90 days, but they can usually be renewed upon maturity.
How are commercial loans different from regular business loans?§
Commercial loans are specifically designed for short-term needs and typically have shorter durations and different terms compared to long-term business loans which usually cover major capital expenditures.
Can a commercial loan be extended beyond the initial term?§
Yes, most commercial loans offer the possibility of renewal, allowing businesses to extend the loan beyond the initial 90-day term if needed.
What are common uses of a commercial loan?§
Common uses include purchasing inventory, financing production costs, and covering distribution expenses.
What are the eligibility criteria for a commercial loan?§
Eligibility criteria usually include a strong business credit score, sufficient revenue, and a detailed plan demonstrating the ability to repay the loan.
Related Terms§
- Working Capital: Funds available to sustain daily operations of the business.
- Short-Term Loan: A loan with a relatively short repayment period, typically within a year.
- Inventory Financing: Loans used specifically to purchase inventory.
- Receivables Financing: A form of borrowing where businesses secure capital by pledging their receivables as collateral.
Online References§
Suggested Books for Further Studies§
- “Bank Management & Financial Services” by Peter S. Rose and Sylvia C. Hudgins
- This book provides comprehensive insights into bank management and the various financial services offered, including commercial lending.
- “Commercial Lending: Principles and Practice” by S. Wayne Sillin
- A practical resource on the principles and practices involved in commercial lending.
Fundamentals of Commercial Loan: Finance Basics Quiz§
Thank you for exploring the realm of commercial loans and for testing your knowledge with our comprehensive quiz. Keep advancing in your journey to financial expertise!
