Commercial loans are not as popular as bank loans. And some entrepreneurs believe that this is an ordinary bank loan. At the same time, a commercial loan is an effective tool for getting money.
What is a commercial loan?
There are always two sides to a loan. In a bank loan, the bank itself acts as the lender, and the borrower is an LLC or individual entrepreneur. In a commercial loan, things are a little different:
- lender – a company or entrepreneur that transfers inventory, work or services to the borrower on credit;
- borrower – LLC or individual entrepreneur who receives goods and materials, services or work and undertakes to repay a loan in the specified period.
If you take a commercial loan, the lender can transfer any goods and materials: raw materials, goods, finished products or money. Likewise, the borrower undertakes to return either money or other property.
In the table, we have collected the key differences between one loan product from another.
|Characteristics||Commercial loan||Bank loan|
|Creditor||Legal entity or individual entrepreneur||Credit institution|
|Loan object||Goods, services and other values. Commodity form of lending||Cash. Monetary form of lending|
|Type of contract||No separate commercial lending agreement. It is prescribed as an additional condition or is drawn up in the form of an additional agreement to the purchase and sale agreement or the provision of services||Loan agreement|
|Borrower requirements||The main role is played by the reputation of the borrower and the period of cooperation with him/her||Good financial condition and solvency of the client|
Types of commercial loans
Commercial loans come in different forms. You’ve probably heard of some of them, and some will be new.
- Deferral – the supplier ships the goods to the buyer and receives the money later. Usually, a delay is given for 30-90 days. But there are also more protracted periods;
- Installment – similar to deferral with one exception. In case of deferred payment, payment is made in one-time in full amount. And with installments, there is always a debt repayment schedule: once a month, once a quarter, etc.;
- Advance payment or prepayment – the buyer transfers money to the supplier-borrower who undertakes to ship the goods or provide the service after a certain period of time.
The types of commercial loans can be combined. For example, 50% advance payment before delivery and 50% of the purchase price within 30 days after shipment. It is a combination of the advance payment and deferral.
Commercial loan forms
This is the most popular option. The terms of payments and their size are clearly prescribed in the contract. For example, in the contract, you can specify that the buyer pays 30% of the cost as a prepayment, then 50% at the time of shipment and another 20% within 15 days.
Consignment is used in the sale of goods, the demand for which is difficult to predict. In fact, such a loan is similar to a deferral. The manufacturer ships the goods to the buyer who will return the money for it only after the subsequent sale. This method of settlement is often used when selling products to intermediaries.
Bill of exchange
A bill of exchange is a security that provides for deferred payment or unconditional payment for goods at a certain time. This paper confirms the obligation of the borrower to pay the money to the lender immediately after he/she presents the bill for payment.
For example, company A sells raw materials to company B. Since B has no cash, companies issue a promissory note. Company B is the drawer, company A is the drawer. In order to receive its money, firm A needs to present the promissory note to firm B.
A bill of exchange can be transferred from one organization to another, like security. For the creditor, this means that at any time he/she can sell the bill to a third party, who has the right to resell it or present it to the drawer.
Commercial loan fee
The cost of a commercial loan is not regulated by law; it is agreed by the parties. The loan fee can be included in the price of the transferred goods and materials or presented as interest on a commercial loan. In practice, when determining the margin, lenders are guided by:
- bank rates on loans – a commercial loan should not be more expensive than a bank loan, otherwise, it is easier for a counterparty to take money from a bank;
- the margin should keep the price of the product at the market level – otherwise, the product will simply not be bought;
- the payment for a commercial loan should cover the lender’s risks – nevertheless, the lender company temporarily loses part of its working capital.
The fee for using the loan can be set in the form of a monthly or quarterly percentage, or even as a fixed amount.
Commercial loan interest
Commercial loan interest is a confusing concept. There are disagreements even in judicial practice. In fact, there are two types of interest on a commercial loan.
Interest in the form of payment for the use of other people’s funds
For example, for deferred payment, the buyer pays interest until he/she pays for the shipped product. Or, conversely, the seller pays the buyer interest on the advance received until the day the goods are shipped. In this case, the interest on a loan is a payment for using other people’s money.
At the same time, if there is no mention of a commercial loan in the contract, then it is no longer possible to demand payment for the use of other people’s money.
The interest on the loan can be anything, even 0%. If the parties have signed an agreement, then it cannot be changed even through a court. Even if the rate is 1,000% per annum, the court will not help.
Interest in the form of a forfeit for late payment
In this case, interest begins to accrue from the day the payment is delayed. The value of this percentage can be any. But the borrower has the right to demand its reduction in court. The main thing is to convince the judge of the disproportionate penalty.
In this case, interest is a penalty for violating the terms of the contract.
The interest for a commercial loan can be calculated from the day when the counterparty owed but did not pay for the goods. In addition, the contract can reflect the interest in the form of a penalty for late payment.
At first glance, both the one and the other percentage is a penalty. However, it all depends on how the given interest is named in the agreement. If the first one is called interest for a commercial loan, and the second one is a penalty, then the court will not have any questions. The debtor’s arguments about the double penalty will be rejected.
Commercial loan at 0%
One can issue a commercial loan at 0% per annum. In essence, this will mean that you have shipped the goods on a deferral basis or have given the counterparty an interest-free installment plan. Then the clause on commercial lending in the sales contract or the provision of services can be removed.
However, we recommend leaving the condition on the penalty for delay in the contract. This will discipline your counterparty and oblige him/her to return everything on time.
Commercial loan term
The term is also not regulated by law. One can issue a loan for any period. Sometimes the lender and the borrower think that the loan term is equal to the grace period specified in the sales contract. But then the question arises “what to do if the debtor does not pay on time?”
It is best to indicate in the contract that the term of the commercial loan is valid until the full actual payment for the purchased goods. That is, even in case of delay, the borrower will not be able to recognize the contract as expired.
For late payment, a percentage can be set – forfeit. Sometimes it is confused with interest on a loan, but the penalty applies only to the overdue portion of the loan and is similar to a fine.
How to draw up a commercial loan agreement?
Draw up a commercial loan agreement in a simple written form. The issuance of a loan can also be formalized as a separate clause or section in the purchase and sale agreement or the provision of services. Be sure to indicate:
- loan amount;
- loan terms;
- interest rate, if any;
- term of deferred payment;
- payment schedule;
- the procedure for collecting a penalty;
- responsibility and rights of the lender and the borrower.
If a commercial loan is interest-free and its cost is included in the price of the goods, then the deferral or installment plan is formalized as separate clauses in the contract. If the loan is interest-bearing, it is better to draw up an additional loan agreement with a mandatory reference to the main purchase and sale agreement.
Therefore, the contract must clearly state the buyer’s obligation to pay interest on the value of the goods, starting from the day the seller transfers the goods and materials. In this case, this interest can be calculated until the day when the payment for the goods will be made. This is the fee for a commercial loan.
Collection of fees for a commercial loan
If the borrower does not pay off the contract on time, the lender will begin the collection procedure. First, you need to try to negotiate. In some cases, they may make concessions – forgive the penalty, lower the percentage, and so on.
If the debtor does not return the debt, the creditor writes a claim. The claim procedure is a prerequisite for further going to court. It is best to send a claim by registered mail. After 30 days from the date of sending the letter, you can go to court.
The claim states:
- the demand, for example, to return the debt, ship the goods, etc .;
- documents confirming the legality of the claim, for example, a sales contract and shipping documents, where all terms are fixed;
- calculation of the claim amount, taking into account penalties.
After 30 days, the creditor can file an application with the Arbitration Court. If the court takes his/her side, he/she will receive a writ of execution, which is transferred to the bailiffs to start enforcement proceedings or sent to the debtor’s bank. It is easier to get money from the bank – according to the writ of execution, they will be written off within 3 working days, but for this, the debtor must have enough funds in the accounts.
Pros and cons of a commercial loan
A commercial loan is beneficial to buyers and suppliers. For everyone, this method of lending has pros and cons. We have collected the advantages and disadvantages for the lender in the table.
|1. The supplier has the opportunity to establish a clear and transparent mechanism for repaying the debt for the supply by prescribing conditions in the contract;
2. At the expense of a forfeit, you can cover your financial losses in case of delay in payment;
3. Interest on a loan is the lender’s additional earnings.
|1. The lender providing a deferral or installment plan temporarily loses his/her own working capital. The probability of a cash gap is increasing. Therefore, creditors must carefully monitor their own obligations;
2. Despite the penalties, the debtor may still not pay on time, the creditor bears significant risks in one way or another.
For the borrower, the pros and cons of a commercial loan are as follows.
|1. You can buy the necessary raw materials, even if you do not have enough money for it at the moment;
2. A commercial loan can be used to close cash gaps;
3. It is easier to get a loan from another company than from a bank.
|1. A commercial loan is an additional cost, that is, the goods ultimately cost more due to interest and markups;
2. In case of delay in addition to interest, you can get forfeit.