Understanding Commercial Loans: Types, Eligibility, Application Process, and Key Features

In a growing economy, enterprises and businesses frequently seek opportunities to scale operations, acquire critical assets, or manage their financial obligations effectively. To support such goals, many businesses turn to commercial loans — a secured, debt-based lending solution offered by financial institutions. Whether it's acquiring machinery, expanding facilities, managing working capital, purchasing income-generating real estate, or refinancing existing obligations, commercial loans serve as a crucial financial instrument. This blog outlines the major categories of commercial loans, explains the standard eligibility criteria, provides a detailed step-by-step application process, and highlights key loan features to help businesses navigate the borrowing journey with clarity and confidence.

What is a Commercial Loan?

Commercial loan is a secured, debt-based loan agreement for lending money between a business and a financial institution, such as a bank, to fund capital expenditure, property acquisitions, operational expenses, or as otherwise agreed upon by the lender. For instance, if a small retailer needs to purchase inventory ahead of the festive season, it can approach an NBFC to borrow the required amount and repay it over a stipulated time duration.

Types of Commercial Loans

Equipment Financing

Equipment financing is a secured loan that helps a business buy or lease business-critical assets such as machinery, vehicles, or technology. For instance, if a manufacturing firm requires around INR 70 lakh for equipment, it can borrow that amount to acquire CNC machines, and repay the sum over 5–7 years. This is one of the most common types of commercial loans offered to businesses.

Commercial Real Estate

A commercial property loan is used to purchase, develop, refinance, or renovate income-producing business properties such as office buildings, warehouses, retail spaces, etc. For instance, a hotel chain often obtains a commercial real estate loan to renovate its downtown property for INR 2 crore, amortized over 15 years.

Bank Overdraft Facility

In a commercial bank loan structure like a bank overdraft facility, there is a short-term, revolving credit line linked to a business transaction account. This means the borrowing company can exceed the set balance in the account up to an approved limit and only pays interest on the overdrawn amount. For instance, if a retail shop has an overdraft limit of up to INR 10 lakh and withdraws INR 2 lakh to cover a sudden supplier invoice, it can repay the overdrawn amount when its cash flow improves.

Term Loans

A term loan is a lump-sum disbursement provided when a business requires a one-time payment. The payment must be paid back to the lender with scheduled principal, interest, and within a stipulated time period. For instance, a manufacturing firm can borrow INR 1 crore as a five-year term loan to purchase new machinery and repay that amount with interest at 9 percent per annum.

Letter of Credit

A letter of credit is a bank-issued guarantee on behalf of a business buyer to the seller. The business buyer utilizes the funds for goods and services in domestic and international trade once it meets all agreed requirements, documents, and conditions. For instance, a buyer in Dubai imports textiles from a Mumbai exporter; on behalf of the importer, the bank issues a letter of credit guaranteeing payment of INR 50,000 to the exporter when the quality inspection and shipping documents are presented.

SME Collateral-Free Loans

SME collateral-free loans are designed for micro, small, and medium enterprises, which guarantee up to INR 5 crore without any asset pledge. Instead, they rely on the company's creditworthiness, future potential, credibility, etc. For instance, if a bakery requires a business property loan of INR 20 lakh, it will be provided under the CGTMSE scheme when the borrower company provides three months of sales records, the promoter's personal guarantee, and the government covers 75 percent of the default risk.

Eligibility Criteria for Commercial Loans

Age

Age requirements specified by lenders must be met by the borrower, typically ranging from 21 years to 65 years, and must not exceed 65 years by the time of loan maturity.

Credit Score

Lenders require borrowers to have a strong personal and commercial credit history, typically including a minimum personal bureau score of 700 or above and a good commercial bureau rating, to avail favorable loan terms and interest rates. For instance, if a shop owner requires a loan for commercial purposes, a personal bureau score of at least 720 and a solid commercial bureau rating would make the borrower eligible for a loan at a favorable lower annual interest rate.

Business Age & Financial Health

Banks or non-banking financial companies will examine the corporation's or company's last two to three years of financial records, continuous operation, and audited financial statements, such as income statements, balance sheets, and cash flows, to confirm the company's financial health and credibility.

Income & Debt-to-Income Ratio

Banks and lenders look at the company's debt-to-income ratio, which is the total debt obligations of the company divided by the net income, to assess its repayment capacity and existing liability risk. They weigh the repayment capacity against the company's existing liabilities.

Collateral

Lenders mitigate risk by keeping the company's pledged assets as collateral, such as real estate, receivables, or machinery, allowing the bank to confiscate them if the borrower fails to repay. For instance, a construction company can pledge its fleet of trucks to secure a loan based on the lender's policy.

Business Plan

Banks and lenders look for a comprehensive business plan and pitch, alongside market analysis, revenue projections, and operational strategy to mitigate their risks. A clear roadmap for business strategy is necessary to convince the bank of the loan's feasibility.

Application Process

Pre-Application Process

First and foremost, conduct a comparative analysis among banks, NBFCs, and other lenders, assessing loan terms, interest rates, processing fees, credibility, expertise, and support systems, so you can select the optimal credit partner.

Gather Documents

Arrange your company's financial statements—such as bank statements for the past three years, audited accounts, proof of business address, tax returns, KYC documents, business licenses, a good credit score, collateral assets, and a comprehensive business plan as discussed above.

Submit Application

Contact the lender to complete the standardized application process, either online or in person, ensuring all required details and documentation are provided. Also, include a loan request letter specifying the loan amount, intended use, and business plan.

Lender Assessment

The bank or lender may visit your office and discuss at length with your management to evaluate your creditworthiness via ratio analysis before sanctioning the loan amount or finalizing the loan terms. The assessment is conducted by the lender's underwriting team; therefore, involves a legal and underwriting professional to ensure compliance with terms and conditions.

Loan Offer and Negotiation

After sanction, the borrower should review the interest rate, tenor, fees, and covenants, and negotiate specific clauses and loan terms with the bank. For instance, processing fees are often negotiated from 2 percent to 1.5 percent for a loan offer of INR 30 lakh.

Loan Agreement and Disbursement

The loan agreement is executed based on the negotiated and agreed terms by both borrower and lender. Once collateral documentation is completed and all pre-disbursement conditions are met, the sanctioned amount is disbursed.

Key Features of Commercial Loans

• Loan Amount: Total funds available
• Interest Rate: Annual borrowing cost
• Repayment Schedule: Payment frequency plan
• Collateral: Secured asset pledge
• Loan Purpose: Funds' intended use
• Loan Tenure: Duration to repay loan
• Processing Fees: Application cost charged
• Prepayment Penalty: Charge for early repayment

Conclusion

Commercial loans offer businesses the financial flexibility to expand, invest, or manage operations effectively. By understanding the types, eligibility, and process, businesses can confidently navigate their borrowing journey.