What Is Commercial Loan And How Does It Work: Complete Guide

Are you in search of a loan to launch a new business or expand an existing one? A commercial loan is one of the most popular ways to fulfil all such needs. Read on to understand a commercial loan in detail. In this article, you will find useful information like what a commercial loan is and how it works. Also, what a commercial loan EMI calculator is, and how to use one.

What is a Commercial Loan?

A commercial loan is a financial tool that businesses use. The commercial loan meets the business’s urgent cash requirements. The commercial loan has the following uses:

• To fund working capital.
• To buy new equipment.
• To construct new infrastructure.
• To pay for operational expenses, etc.

How Does It Work?

There are various sorts of commercial loans and commercial lenders. Most will have specified terms like a fixed repayment schedule, and interest rates. The repayment schedule and interest rates depend on a borrower’s creditworthiness. Commercial lenders demand specific assets like machinery, commercial land, etc, as collateral. Let’s now move toward the application process for a commercial loan.

The Procedure of Commercial Loan Application

Here’s a quick rundown of how a commercial loan works.

1. Inspection process. The application process starts with the lenders (banks) evaluating the following:
   • The financial history of your business.
   • Income of the business.

This gives the lender a rough idea of how your business will perform on the repayment schedule.

2. Loan Application. Next, the business (borrower) completes the loan application and submits the required documents.
3. Review of Loan Application. Next, a loan officer reviews your loan application and the submitted documents. The loan officer carries out financial analysis for the following:
   • Credit history.
   • The business’s available collateral.
   • The current and projected income of the business.
4. Loan Committee. After this, the loan application goes to a loan committee. The loan committee further analyses the loan application. And finally decides whether to approve or decline the loan.
5. Term Sheet. If approved, the loan processor presents a term sheet comprising
   • the parties involved,
   • the amount of financing,
   • available collateral,
   • extra fees,
   • use of the loan, and
   • the interest rate on the loan.
6. Final Approval. After the final review of the term sheet, the borrower and the bank sign a letter of intent. Finally, the bank approves the loan and asks the borrower to carry out the paperwork with a bank agent.
7. Loan Disbursal. In a few weeks, the bank disburses the loan amount into the borrower’s registered account. The borrower is free to use the loan amount.

Understanding Commercial Loans EMI

An EMI stands for Equated Monthly Instalment. It is a pre-set fixed sum that a borrower pays on a certain day each month. EMI is to pay off the loan amount within the allotted time frame. A part of the loan’s principal amount and interest together make up an EMI.

Factors that Impact Commercial Loan EMIs

The following factors impact commercial loan EMIs:

• Principal Amount: It is the amount you borrow from the bank. The EMI will increase and decrease in direct proportion to this amount.
• Rate of interest: The rate of interest is one of the main elements affecting the EMI amount. The EMI payable increases with the interest rate, and vice versa.
• Loan term: The longer the loan term, the lower the monthly interest payment will be.

What is a Commercial Loan EMI Calculator?

Although each EMI for your loan is the same, the interest rate and principal amount change. In the early stages, the interest amount is larger and the principal amount is smaller. As your total outstanding loan balance decreases and the interest amount decreases. Manually calculating EMIs can be a complicated task. Here is when a commercial loan EMI calculator is useful. With the information you enter, the EMI calculator calculates your loan’s EMI. Let us understand this in detail.

How Does the Commercial Loan EMI Calculator Work?

You should know the following information before using a commercial loan EMI calculator:

1. The entire amount borrowed.
2. The interest rate to the principal amount.
3. A loan’s term.

Using a commercial loan EMI calculator, follow these simple steps to calculate EMIs:

1. Put in the loan amount you wish to apply for.
2. Enter the appropriate interest rate.
3. Determine the loan’s term based on your ability to repay it.

After this, the commercial loan EMI calculator assesses the following figures:

1. Total interest paid throughout the term of your loan.
2. The principal amount plus interest.
3. EMIs, the equated monthly instalments.

Why Should You Use a Commercial Loan EMI Calculator?

The following points justify why you should use a commercial loan EMI calculator:

• Saves time: As you enter the requested information, the calculator calculates the EMI in seconds. This saves you time from manual calculations.
• Accuracy: Manual calculations are prone to inaccuracies. But using a commercial loan EMI calculator yields accurate results.
• Financial planning: Calculating precise EMIs is important. It will help you plan your finances better based on your income and savings.
• Multiple schedules: Use a commercial loan calculator to assess various schedules. You can choose the EMI option that best fits your ability to repay the loan. Do this by comparing several loan tenures and interest rates.

Bottomline

A commercial loan is a loan that supports businesses. With this, the business can meet day-to-day expenses and expand its business. The commercial loan requires collateral. Collateral such as commercial land, expensive machinery, etc. You can use an EMI calculator to calculate EMIs easily. Apply online at Piramal Finance to avail of a commercial or business loan.