A commercial loan is designed to meet the funding needs of a business. Arranged between a financial institution and a business, this loan can be used for specific business objectives, such as expanding the business, operational improvements or the purchase of assets. Commercial loans play a crucial role in supporting growth and stability.
In 2022, the average value of a commercial loan was £14,000, with 69% of businesses stating the reason for the loan agreement was “cash flow related”.
How does a Loan Agreement Work?
A commercial loan agreement will outline the terms and conditions under which a business can borrow the funds. These agreements will specify the loan amount, interest rate and the repayment schedule. Lenders will assess the creditworthiness of the business and consider the business’s financial history, cash flow and overall business plan.
Types of Loan
Commercial loans come in various forms to accommodate the diverse needs of different businesses. These can include both short term and long term loans. More information can be found here: www.parachutelaw.co.uk/loan-agreement.
Short term loans, sometimes called “mini-perm” loans, typically last for three to five years, and are usually used for property purchases.
Renewable loans are also on offer, allowing businesses to extend them indefinitely. However, for this to apply, a business would need to show that they have stable ongoing business operations and were able to pay back the first loan agreement in the specified time period. These types of loan agreements are useful for businesses that have large seasonal orders for certain customers.
Long term loans are often used for acquiring property, land or large-scale equipment. This type of loan provides the necessary funds over an extended period, allowing the business to make strategic investments and manage repayment through a structured, manageable schedule.