Jasmine Directory

Commercial lending involves financial institutions that lend money to established businesses and partnerships. Lending options may include a revolving line of credit for businesses to maintain working capital as needed. Additionally, loan terms and interest rates usually frame the process of commercial lending. In many cases, commercial lending is beneficial to small businesses that do not have access to capital markets. This type of financing can help small businesses thrive.

Large companies can also take advantage of commercial lending products. High-growth companies may experience a stall in profits during sluggish periods in the economy. Stocks and bonds do not move as quickly in public markets. When this occurs, commercial lending is an alternative for these companies.

Generally, lenders will consider five key elements in making a decision to grant a commercial loan. First, lenders examine the business's capacity to determine whether the business can repay the commercial loan. Part of this examination includes accessing the business's cash flow and assets. A strong cash flow is a good growth indicator of the business's solvency.

A steady cash flow for a period of two years or more is a good sign that the business can repay the loan according to terms. If the cash flow is weak, the lender might evaluate which assets can be solid collateral.

Business assets can be used as a pledge for repaying the commercial loan. Sometimes, the lender will require a personal guarantee for the loan. Generally, the owner and/or principle investors must include personal financial information. This information is used by the lender to collect on the loan based on the personal guarantee if the business entity defaults.

Conditions of a commercial loan are another key element for lenders. Commercial loans for general capital needs are not given strong considerations. Typically, lenders prefer to grant commercial loans for capital equipment purchases.