Commercial loan: conditions, forms, rates

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

Businesses often pay each other with commercial credit. Thus, it is more convenient for each company to attract borrowed funds than to extract its own money from circulation. This method is especially relevant for small firms that simply do not have their own savings, so for development they need to attract funds from banks or third-party organizations. A commercial loan is considered an actual way out of a difficult situation, and it is presented in several forms. It sets a variety of rates and conditions, so you should have a good understanding of the rules of registration in order to guarantee the efficient use of borrowed funds.

Concept

Although it is considered a loan, it has many specific features:

• do not issue loans of this type to state or commercial banks, as firms cooperate with each other for this, therefore an intermediary in the form of a banking institution is not involved;
• no special license required for this process;
• such a transaction does not act as a separate process, therefore, a special agreement is not drawn up for it, sinceonly an additional agreement to the main contract is formed;
• companies and enterprises themselves act as lenders and borrowers;
• it is allowed for the participants to be individuals or individual entrepreneurs.

Loans provided by commercial banks are not considered commercial, as they are presented in monetary terms. When an appropriate agreement is drawn up between enterprises, the loan is usually presented in a commercial form. Under these conditions, the transaction is complementary, so a simple written form is suitable for its expression.

How is it different from bank loans?

Commercial credit is a transaction, the parties to which are different firms that do not have a banking license. It can be provided by both the seller and the buyer, so it can be expressed as an installment plan, deferment, advance payment or prepayment.

A commercial loan has many differences from a standard loan offered by banking organizations.

Criterion	Commercial loans	Bank loans
Lender	Different legal entities, individuals or individual entrepreneurs who enter into various contracts with each other involving the supply of goods	Only licensed banking institutions
Submission form	Commodity	Money
Interest rates	Low, ranging from 3 to 15 percent	High, and for different loans they can even reach 50%
Loan fee	Included in item price	Determined as a fixed or floating percentage, which depends on the amount of the loan issued

Thus, commercial banks provide loans that are significantly different from a commercial loan, so these concepts should not be confused.

Commercial loan forms

It can be presented in different forms, each of which has its own characteristics. A specific form is negotiated in the process of forming a contract between companies. At the same time, it is decided what will be the procedure for granting a loan, what tariffs and other conditions of a commercial loan will be established. In most cases, such a process is formalized in the form of an additional agreement to the main contract.

If the main contact is formed in writing, then the contract for a commercial loan is made in the same form. The same applies to documentation registration.

Forms of commercial credit are numerous, but the most common are:

• Advance payment. It is a partial payment that is made by the buyer, so he acts as a creditor. Based on the terms of the contract, he pays for it before the direct receipt of the goodsfull cost. The credit period starts from the moment when the advance payment is transferred, and ends on the day when the buyer receives his goods.
• Advance payment. Based on the terms of the agreement, the buyer pays in full for all goods in advance, so he is also a creditor. Prepayment implies that services are provided or goods are shipped some time after the seller receives the money. Therefore, the loan term may vary significantly depending on the conditions specified in the agreement.
• Delay. The provision of this form of commercial credit involves the seller shipping goods or providing a service, and payment for them will be received by him later. It can be represented by several transfers of money or one large payment. The time when funds should be transferred is stipulated in the contract in advance. The creditor is the seller, so he can demand the timeliness of the return of funds. If this condition is not met, then fines are charged on a commercial loan. They can be stipulated in the agreement or calculated based on the size of the refinancing rate.
• Installment. The creditor is a seller who wants to sell his goods, so he agrees that they are paid not in full, but in part in equal payments. A special schedule is drawn up, on the basis of which the buyer must pay for the goods.

Thus, commercial credit can be presented in different forms, and also it is provided in different ways. Each method has its own characteristics, so it should be studied by sellers and buyers separately.

Promissory note credit

It is considered the most popular commercial loan method. For calculations, a written obligation is used, in which the exact amount of a commercial loan is prescribed. It is these funds that must be provided by the borrower to the lender.

Various promissory notes can be used to use this loan method:

• Solo promissory note. It is called in another way simple, and at the same time, its use requires that two parties take part in the transaction. A specific period is established, at the end of which the drawer, who is the borrower, pays the amount specified in the agreement to the creditor. Typically, such a bill is used for domestic settlements.
• Tratta. Such a bill is called a bill of exchange. It assumes that an additional third party is involved in the transaction. The drawer, who is the creditor, indicates to the drawee, represented by the borrower, when the goods under the contract must be paid for in favor of a third party, called the remitter. Typically, such a bill is used for interstate settlements. The payer under such conditions is the exporter's bank.

Thus, it is optimal for Russian companies to use a promissory note to arrange a commercial loan.

Factoring and forfaiting

Factoring is a popular form of commercial credit. Heconsists in the fact that a bank or a special firm collects receivables from other client enterprises. The firm buys the debt from another creditor, to whom the required amount must initially be paid. But at the same time, he receives only a certain part of the amount, and the remaining funds are transferred as soon as the money is received from the debtor. Sellers resort to this method if the debtors do not return the funds on time, so due to the efficiency of receiving money, they can use it for development or use in circulation.

Forfaiting is a form of factoring, but the difference is that on-lending is implemented in foreign trade relations, and a bill of exchange is also required.

Leasing

This type of commercial loan is becoming more and more popular with Russian organizations. It consists in the fact that certain real estate, vehicles or other valuable property is transferred to a long-term lease to another person. At the same time, it remains possible to buy this object in the future, for which a residual value is set.

Most often leased for acquisition:

• property that is residential or commercial;
• vehicles;
• equipment necessary for the operation of a particular organization.

With such a loan, purchases are made for a leasing organization that acts as a creditor for the end user of the equipment. An agreement must be concluded between the two parties, in which it is prescribedthe procedure for granting leasing, as well as the terms when it is possible to redeem the subject of the contract.

Consignment

It is considered a common form of commercial credit among Russian entrepreneurs. In another way, such a process is called "goods for sale." The procedure is that the owner of the object, who is the consignee, provides the consignee, represented by an intermediary, with a specific product. It is further sold to the final consumer.

The intermediary pays for the goods not immediately, but after the sale. If it is not possible to sell the goods, then it is returned to the manufacturer, so it is considered that the transaction did not take place.

This method is used in a situation where a new product is supplied to the market, so there are doubts among sellers that it will be in demand.

Open account

Such a commercial loan is used by companies that have good and long established relationships. It lies in the fact that certain batches of goods are systematically delivered to the buyer, and at the same time a deferred payment is provided.

Such a transaction does not require documentation for each delivery, but it is agreed in advance what the maximum limit of the resulting debt. If the invoices are not paid by the buyer in a timely manner or the goods are not provided, then this is a violation of the contract. For this, a pen alty is charged, and the commercial loan rate can be prescribed in the agreement or can be calculated based on the refinancing rate, which is setat a specific point in time.

Discounts for paying on time

Suppliers of goods can motivate buyers who make timely payments for delivered goods. When signing a contract with such a client, suppliers offer discounts.

The main condition for using such a commercial loan is the need for the timely payment of funds by buyers.

Seasonal credit

This lending option is used only by enterprises operating in the seasonal business sector. To do this, the seller sends the goods to the buyer in advance, which allows the recipient to form optimal stocks before the sale or the season.

Pay for goods after the end of the season, when the debtor receives the necessary funds for this.

The advantages of such lending for the seller include the possibility of saving on warehouse rental, and the buyer receives a deferred payment.

Board size

Commercial loans are practically not regulated by Russian law in any way. Since it is possible to use goods or money for a certain period of time, a payment for such a loan is required.

The commercial loan rate is much lower than bank interest, so using this method is considered a profitable process for every firm. It remains unchanged in the process of cooperation between companies.

Interest on a commercial loan is usually set in the agreement itself, drawn upbetween two parties. This takes into account some important points regulated by the market itself:

• the rate should be lower than in a bank or other credit institutions, otherwise this method of lending will not be attractive to companies;
• the fee must cover the costs of the lender, otherwise it would be inappropriate to provide goods or funds;
• Loan fees should not lead to a decrease in the competitiveness of goods.

It is allowed to additionally indicate the amount of forfeits and fines in the contract if the main points of this document are violated. For this, direct interest on the established loan amount can be prescribed, and if such information is not available, then information from the legislation is used, therefore, the size of the Central Bank refinancing rate is taken for calculation.

Terms and fines

With long-term cooperation between companies, there may not be a fee for using a commercial loan, so interest is charged only if the terms of payment or delivery of goods are violated. In this case, interest acts as a pen alty for non-compliance with the terms of the contract.

Typically, a commercial loan agreement does not set strict deadlines, so there are some gaps in time.

Pros

The positive aspects of such a loan include:

• it is possible to receive the necessary goods without payment without applying for a bank loan or receive payment for goods not yet shipped;
• creditor increasesturnover if he is a supplier;
• the buyer can lay low interest for such a loan in the cost of goods;
• businesses support each other through this offer;
• firms maneuver their capital;
• reducing the need for standard bank loans.

Due to competent and official registration, it is possible to recover funds from the borrower forcibly through the court.

Cons

Commercial credit has not only advantages, but also some disadvantages:

• limited by supplier's inventory or borrower's ability to pay;
• due to regular changes taking place in the market, it is not always advisable to use such an offer;
• product prices are constantly changing, and at the same time, the buyer, having paid for a large batch of goods, will no longer be able to change his mind;
• the borrower can always declare himself bankrupt, so the lender can lose his funds;
• there is a possibility that the parties will not perform the terms of the contract in good faith.

Thus, commercial credit is provided by companies that do not have a banking license. It can be presented in different forms, so the option that is ideal for specific organizations is selected. The amount of the fee is set by the two parties, but it is always less than the interest on bank loans. Such a loan has both pros and cons, so each enterprise should carefullyassess the effectiveness and feasibility of such a contract.