Many businesses turn to commercial debt as a way to finance projects and day-to-day operations. This term has reference to debt owned by a private sector creditor, usually a commercial bank. It can come in the form of short-term, intermediate-term and long-term loans, as well as credit cards. Creditors with secured debt are having easier access to business assets, but businesses are still having a liability for unsecured and informal creditors.
Commercial Loan Length and Rates
Commercial loans may be short-term, intermediate-term or long-term loans. Generally, short-term loans are due within 6 to 18 months whereas, intermediate loans are paid back within 3 years. As usual, long-term loans are due within 5 years. As a rule of thumb, you will pay higher interest rates on shorter loans. However, since you are paying back the principal over a shorter period of time, you may not incur as much total interest expense in comparison to a longer loan.
Commercial Credit Cards
Although business owners often associate commercial debt with bank loans, credit cards are another source of commercial debt. Many small business owners turn to credit cards as a way to finance initial business costs. Credit cards may be easier to procure as compared to a business bank loan and many of those have lower introductory interest rates. But, the expense on interest can quickly add up once the promotional period expires.
Secured Versus Unsecured
There can be a secured or unsecured commercial debt. Secured debt means that some asset is held as a security interest or collateral by the commercial institution. The collateral for a secured business debt can be either a vehicle, property, buildings, equipment, furniture or even inventory. If a business defaults on the debt, or fails to make disbursements, the creditor has the right to repossess the collateral. For unsecured debt, creditors who didn’t keep anything as a security, in general, have to sue the business prior to the collection of any property.
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