commercial loans
Commercial loans are a form of debt financing provided by banks. They are not insured by the government like an SBA loan, so banks will exercise a great deal of caution before lending a person or company money. They will generally require significant collateral, a strong financial history, and in the case of a business, good operating results.
There are a broad range of commercial loan types. Here are several of the most common:
- Term loans--a fixed amount of funding that is repaid according to a schedule over some period of time
- Lines of credit--an unfixed amount of funding with a cap that can be drawn upon or repaid at the customer's need but the customer has to pay interest
- Letters of credit--this is a guarantee that the bank makes on an amount of funding that some other institution might provide
Motivation and timing of investor
Banks are in the business of making money. They will look to get their principal back plus interest. They will generally want regular interest payments in the short-term though they may not need principal payments for some time.
Typical Amount of Funding
The typical amount of financing will depend on the value of your collateral or the performance of your business.
Availability
Every commercial bank makes commercial loans. So this kind of funding is widely available. The issue for startups or new ventures is that they typically do not have enough operating history or strong enough financial results to get a commercial loan.
Interest and Principal Payments
Commercial loans require interest and principal payments.
Equity
Commercial loans do not involve equity.
Control
The bank will generally make the company adhere to certain covenants. Common covenants include:
- Affirmative Covenants--things you must do
- Maintain legal existance of your company
- Stay current on taxes
- Have business insurance
- Must issue financial reports
- Negative Covenants--things you cannot do
- Have to limit how much debt you have
- Not allowed to issue dividends
- Not allowed to merge with or buy another company
- Cannot add any new liens to the company (at least those that are senior in the capital structure to the bank's loan)
validation / Other
Bank loans do provide some form of validation since banks are extremely cautious about the quality of companies to which they will lend their money.