Commercial Loan Types Explained

Commercial Loan Types Explained

In finance, a loan, also known as a commercial loan, is the lending of monies by one or more persons, institutions, or other identifiable entities to others, organizations, and/or other persons. The recipient is legally liable to repay the principal sum borrowed and also to pay interest on this debt at regular intervals until it is fully paid. The term of a loan can be a year, five years, ten years or twenty years. Commercial loans are used for a wide variety of purposes, including purchasing real estate, establishing new businesses, paying debts, making improvements in real estate and so on.

A loan can also be secured or unsecured. In secured loans, the security of title, ownership, or something equivalent is required to assure the loan’s repayment. These securities usually include the property on which the loan is made (lien). In unsecured loans, no collateral is required to assure the loan’s repayment. In some instances, both types of loan may be made at the same time, although most conventional loans are usually of a secured type.

Commercial loans are classified into two: secured and unsecured. In secured loans, the risks of recovery of the loan amount and loss to the lender if the borrower fails to meet the repayment principal amount are reduced. For unsecured loans, there is no reduction in the risks of recovery of the loan amount and the risk of loss to the lender if the borrower fails to meet the repayment principal amount. Interest rates and penalties on late repayment are applied to secured loan amounts.

Commercial loans can be of various types, including commercial bridge financing, business line of credit, business loan, business loans, merchant cash advance, manufacturing loan, mortgage, personal loan, refinancing, tax credit, and specialty credit. There are also subtypes of commercial loans, including merchant cash advance, tax credit, and manufacturer financing. There are special types of commercial finance charges, such as installation charges, reserve fund, and miscellaneous charges. These charges are normally assessed against the amount of the loan, whereas other charges, such as property insurance, are imposed on the borrower according to the extent of the loan.

Commercial loans can also be unsecured or secured. The most typical form of a secured loan is a loan backed by an asset. This asset can be in the form of real estate, but is not limited to it. Common property that would qualify for a secured loan includes a building or structure, certain equipment, real estate owned personally by the borrower, land used exclusively for business purposes, personal property owned by the borrower, and personal belongings. A commercial building or structure is deemed to qualify for a secured loan when the property is leased to the lender. Certain assets, such as personal properties, are deemed to qualify for an unsecured loan if they are used as collateral to secure the loan amount.

Secured loans have higher interest rates than unsecured loans because the lender has to bear a greater degree of risk in offering the asset as collateral. However, if the borrower defaults on the loan, the lender is at a great disadvantage. The debtor takes advantage of the lender’s situation and uses the threat of bankruptcy to force payment of outstanding debt. The debtor offers the lender a substantially lower monthly payment and forgives the debt by discontinuing making monthly payments. The effect is that the debt is paid off with the monthly payments that the borrower formerly would have paid, but at a much higher interest rate.