Commercial loan – transfer of a certain amount of products or money to another. Two parties take part in financial relations: the lender and the borrower.
The main essence of commercial lending
Commodity credit is one of the types of commercial loans, so within its framework, not only money can be issued in debt, but also products or certain services.
Commercial credit is an important and integral part of a medium and large business. It allows you to purchase the necessary equipment, components, products, or services without withdrawing funds from working capital.
Unlike a standard bank loan – where the main role in making a decision is given to the client’s solvency and credit rating, in this case, the reputation of the company is important. Informal ways to identify the reliability of the borrower are an important aspect when deciding to conclude a commercial loan refinance agreement.
Subjects
The current parties to the loan agreement may be industrial and trade organizations, service enterprises, individual entrepreneurs, and non-profit organizations.
The main subjects of credit relations:
- The borrower: The person undertakes to return the full cost of the goods or the amount with interest within the agreed period.
- The creditor is the loaning party. He is the owner of the product or money. Provides service in order to make a profit in the form of interest.
There may be more than two parties to the contract, but the essence remains the same.
Objects
Goods, products, services rendered, or work performed is accepted as an object. The main purpose of the use is to make a profit for both parties. Several objects may be present in the contract at the same time.
Difference between commercial and bank credit
The main difference from the standard loan obligation is the absence of a banking organization in the agreement.
Types of commercial credit and its forms
The main types of commercial loans are:
- Deferral – repayment of the loan is carried out in one payment during the period specified in the agreement.
- Installments – payment is made in several payments, the total amount of which is equal to the loan.
- One-time payment is a contract with clear terms of repayment (term, payments, and periodicity).
- A bill of exchange is a written obligation to repay the debt.
- Consignment – provision of products or goods with subsequent reimbursement of the cost.
- Advance payment – prepayment for a product or service.
The most popular are combined options that combine the properties of several types of loans at once. For instance, land and construction loans california.
Pros and Cons
The clear advantages of a commercial loan are:
- The opportunity to purchase the necessary goods and equipment or get money for business development immediately.
- More favorable lending conditions than in banking institutions.
- Business development without the use of funds in the company’s circulation.
- The ability to choose the right form of a loan or combine several varieties.
The disadvantages of commercial lending include:
- Increased risks on both sides. The lender may supply low-quality goods or offer unfavorable conditions, and the borrower can give only part of the money, not return the funds at all or delay the payment.
- Overpayments because of interest. With a competent calculation of expediency, both parties remain in the benefit, so the minus is insignificant.
- Commercial credit is an excellent solution for the development of enterprises, as it opens up a lot of opportunities for business development and expansion. It is important to carefully study the clauses of the contract so that the terms of the loan are beneficial to both parties.
