Legal Definitions - commercial loan

A commercial loan is a type of debt financing provided by a financial institution, such as a bank or credit union, specifically to a business entity rather than to an individual for personal use. These loans are designed to fund various business activities, including starting a new venture, expanding existing operations, purchasing assets like equipment or real estate, managing cash flow, or financing inventory.

Here are some examples to illustrate the concept of a commercial loan:

• Example 1: Funding Business Expansion

  Imagine a successful local coffee shop that wants to open a second location in a neighboring town. To cover the costs of leasing the new space, purchasing additional espresso machines, and hiring more staff, the owner applies for a loan from a bank. This loan, specifically granted to the coffee shop business for its expansion project, is a commercial loan. It's distinct from a personal loan the owner might take out to buy a car or renovate their home, as its purpose is directly tied to the business's growth and operational needs.

• Example 2: Acquiring Business Assets

  Consider a construction company that needs to purchase a new, large excavator to take on bigger projects. The excavator costs a significant amount, and the company doesn't have enough cash on hand. They secure a loan from a bank, using the new equipment itself as collateral, to finance this purchase. This is a commercial loan because the funds are used by the business to acquire an asset essential for its operations and revenue generation, rather than for an individual's personal property.

• Example 3: Providing Working Capital

  A small manufacturing company experiences a temporary slowdown in orders, but still needs to pay its employees, cover utility bills, and purchase raw materials to fulfill upcoming contracts. To bridge this short-term financial gap, the company obtains a line of credit from its bank. This line of credit, which allows the company to borrow and repay funds as needed for its day-to-day operations, is a form of commercial loan. It provides the necessary working capital to keep the business running smoothly during fluctuating market conditions, without being tied to a specific long-term asset purchase or expansion project.