Pros And Cons Of Commercial Loan
A commercial loan is a loan from a bank to a business. Commercial loans are usually used to buy long-term assets or to cover operational expenses. This article outlines the Pros And Cons Of Commercial Loan.
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A Commercial Loan Explained
Small and medium-sized enterprises cannot access the equity and bond markets due to regulatory restrictions, expenses, and time requirements. So small and medium-sized businesses employ commercial loans and/or lines of credit.
Commercial loans can be used to acquire assets, purchase supplies, meet daily operations costs, pay payroll, etc. The business must state the purpose of the commercial loan when applying for it.
Obtaining a Commercial Loan
The procedure of obtaining a commercial loan varies per lender. Obtaining such a loan involves the following steps:
Pre-approval 1 (Qualifying process)
The lender (bank) will start the pre-approval procedure by examining the business’s financial history and income. The lender will also look at the company’s debt and the loan’s purpose. A pre-qualification process gives the lender an estimate of how much money the company can borrow and how risky the borrower is.
2. Loan request
Following pre-qualification, the company must submit a loan application. Financial statements or equivalent records from the last three years are usually required. This ensures the company can repay the loan.
3. Examining the loan application
Then, a loan officer will analyze the due diligence paperwork. They will look at the business’s credit history, collateral, present and projected income, etc. Financial analysis is a key aspect of due diligence.
4. Loan committee/underwriter
If the loan officer approves the loan request, a formal credit application is sent to a credit adjudicator or loan committee. The adjudicator weighs all the evidence before approving or declining the loan. During the evaluation, the company may be compelled to present more documentation.
5. If authorized, the processor will provide a term sheet. A term sheet is a formal document that details the parties involved, the loan amount, collateral, fees, and interest rate. Third-party reports, including as appraisal reports, may be required after signing the term sheet and the letter of intent.
6. Loan documents and closing
To finalize the loan application, the entire package is resubmitted to the loan underwriter. If authorized, the company must sign final loan documents. A closing agent (e.g., an authorized person, an attorney, etc.) handles all closing documents and documentation.
Commercial Loan Benefits
1. Capital access
A commercial loan boosts a company’s cash flow. The money can be used to buy new equipment, pay payroll, etc.
2. Ease of application
Obtaining a commercial loan is easier than raising capital through the stock or debt markets. Raising capital through the equities or bond markets involves considerable expenses and effort.
3. Ownership
A commercial loan does not reduce a company’s equity. A company may issue equity to raise funds. The owner would be reducing their own stake in the company. This means an owner can obtain funds without diluting their ownership in the company.
A Commercial Loan’s Drawbacks
1. Application and paperwork
A commercial loan involves extensive paperwork and a lengthy application process. For example, a company may be required to submit a business plan overview and convey its goals and objectives.
2. Funding inflexibility
When requesting for a commercial loan, the company must state the purpose of the funds and how they will be repaid. Consequently, the funds are rigid because the company must stick to its initial plan (s).
Pros And Cons Of Commercial Loan: Conclusion
A commercial loan has a fixed or adjustable interest rate. As a result, the company must make monthly payments on its debt.
What does it take to become a world-class Commercial Loan Broker or Commercial Loan Officer? The Commercial Banking & Credit Analyst certification is offered by CFI.
