Commercial lending is a process wherein startups can borrow money from banks or NBFCs to run their business smoothly and cover additional costs of equipment. Commercial lending is usually of two types- secured and unsecured loans. This type of loan is usually preferred by SMEs to receive funds faster.

The Covid-19 pandemic had a colossal hurling effect on the world and lashed out at several industries. The havoc forced people to hustle for new and reliable sources of income to withstand the unprecedented times; while some switched to the trending trading world, others stepped into the business sector. When it comes to running a business, there are several crucial aspects one needs to take care of, however, easy funding is the foremost or prerequisite aspect that can build or break a business. This is where commercial lending comes into the picture where emerging startups can borrow money from non-banking financial company (NBFCs) and banks for developing their business and purchasing equipment.

As per a comprehensive report published by Research Dive, the global commercial lending market is estimated to gather a revenue of $27,406.6 billion by 2028 and grow at a healthy CAGR of 14.4% during the 2021-2028 forecast timeframe. Considering this tremendous growth rate, it is important to understand some basics of commercial lending, its advantages, and disadvantages. Let’s explore!

What is Commercial Lending?

Commercial lending is when a business borrows money from a bank to pay its business expenses, equipment purchases for proper operations, or for real estate. These can range from short-term funding to long-term real estate loans that can be up to 30 years. Expensive administrative costs and regulatory hurdles usually prevent small-scale businesses to gain direct access to equity markets for financing and so, they must rely on other types of loans like term loans, unsecured loans, and lines of credit.

How Does Commercial Lending Work?

Commercial lending is often considered an extensive loan option since it involves an extremely stringent approval process. Moreover, the borrower is also asked by other organizations to wait for few days which can take quite some time. But once you clear all these required approval phases, you can get your funds faster.

When a company lends you money, you ought to pay it back, failing which will cause you denial for more borrowing from almost every other company in any situation. With each loan, you are allotted a term of time to pay back which is usually a one to five-year time period. Although the company will not shut your business instantly, if you fail to pay back the loan, the company will mostly extend the loan at the penalty which was mentioned in your contract.

Pros and Cons of Commercial Lending for Small Businesses

Here are some proven benefits of commercial lending for businesses:

1. Offers a cash flow boost for your business
2. Maintains your business ownership that doesn’t go into the hands of investors
3. Offers lower interest rates than other loan types
4. Longer-term of pay
5. No need to provide collateral for receiving the loan in case of unsecured loan types

Although this loan option might sound like a safe and reliable way to receive money for your business, it is not suitable for every small business and has some downsides.

1. Exhaustive paperwork and stringent loan application process
2. Requires even your personal financial history like annual income and unpaid debts
3. Terms of commercial lending option are not flexible

Bottom Line

Commercial lending is a great way to receive funds and operate your startup since it offers a longer time period to pay back the loan and has lower interest rates. If your business generates regular revenue but you still require some additional money to expand the operations, then you should definitely consider commercial lending. However, for businesses otherwise, this might not be a suitable solution and has some downfalls.