Basic Commercial Lending Terms

Commercial loans are very often required by people for helping them out in their business ventures. However when searching for loans, it is often seen that the people come across several terms that they may have never heard of before. There are several basic commercial lending terms with which one needs to be familiar with, when looking out for commercial loans. By being familiar with these terms it will be easier for the individuals to make out the difference between the various commercial loans that are available in the market, and be able to choose the one that best suits their needs.

Some of the basic commercial lending terms that all people should have some idea include among others cash flow, collateral, debt service coverage ratio, loan to value ratio, and promissory note. By having knowledge about these basic commercial lending terms, it will be much easier for the people to understand the various factors that they will come across while taking a commercial loan.

Cash Flow: In any commercial venture, a lot of money is earned and spent in order to meet the various business needs. The difference between the amounts of cash that has been received to the amounts of cash that has been paid is referred to as cash flow. The cash flow helps in determining how a particular business is faring, and is considered to be an important factor that is used by lenders, when issuing commercial loans.

Collateral: When a commercial loan is taken by an individual or a company, a security needs to be provided with the loan giver. The loan giver can seize the security, which is usually in the form of some asset, when the individual or company is unable to pay back the loan amount. This security on commercial loans is known as collateral.

Debt Service Coverage Ratio: When a commercial loan is sought out by an individual or business from a financial institution, then an important factor that is taken into account by the finance institution is the debt coverage ratio. It suggests whether the loan seeker has the capability to pay back any loan taken in time. A higher ratio suggests that the loan will be repaid quite easily by the loan seeker.

Loan to Value Ratio: Of the many other factors that are taken into account by a financial institution, when issuing a commercial loan to a particular borrower, is the loan to value ratio. The ratio is measured by the ratio of the total value of the loan that is sought, to the original value of the property which will be bought.

Promissory Note: When a commercial loan is issued by a financial institution, to a borrower, a written contract is signed between them, which is known as promissory note. This contract acts as documentary evidence, to prove that a loan has been taken by the borrower from the lender.

These are some of the basic commercial lending terms that people will come across while applying for a commercial loan from any financial institution. Before people begin looking for commercial loans for their business, they should try to gather as much knowledge as they can about the various basic commercial lending terms.