It is customary for large corporations to rely on equity markets to obtain financing to grow their businesses. But in the case of small and medium businesses, this is practically impossible. The steep costs and many regulatory hurdles prevent SMEs from gaining access to similar funding options. Fortunately, there are more obtainable means of securing funds, such as commercial business loans.
Commercial Business Loan Application
Commercial business loan application is not necessarily a difficult procedure. However, if you have never applied for one before, the whole process can really become confusing. In this article, we will talk you through the steps needed to file an application, as well as some other fundamental concepts about commercial business loans.
What Is a Commercial Business Loan?
A commercial loan is a financial solution provided by lending companies to businesses that are in need of extra funds. These loans are typically used for the acquisition of assets or for assisting with daily expenses. They can also be useful for making payroll, purchasing inventory, and so on. While they are indeed quite versatile, you will need to specify a clear purpose when you file a commercial business loan application with a lending company.
Pros and Cons of a Commercial Business Loan
One of the primary advantages of commercial loans is that they can provide you with funds that you can use for a variety of purposes. You are not tied to any particular use, although you will have to specify your purpose to the lender.
Another advantage is that the application process is relatively easy. It might seem complicated in the beginning, as all things are when you are doing it for the first time. But if you compare it to accessing funding through equity markets, commercial loans are much simpler.
Also, when accessing equity markets, you stand the chance of decreasing your stakes in your own business. You might be able to get funds but you will inadvertently be reducing your equity in your business as well. With a commercial loan, your ownership of your business is not affected in the least.
As for the cons, the biggest one is probably the amount of paperwork involved during the application process. It’s not really difficult but it can be tedious. Also, once you specify the purpose of the loan, you can’t use it for any other purpose. In other words, there is no option of diverging from the original plan.
The interest on a commercial business loan is fixed. This might actually be a pro or a con, depending on the kind of business that you have. In any case, you will have to make payments every month until the loan is fully repaid.
Types of Commercial Business Loans
There are a lot of reasons for needing extra cash when running a business. Lending companies realize this, and that is why they have created many different kinds of commercial loans to cater to all these needs.
Commercial Real Estate Loan
These loans are obviously designed to help you purchase real estate property. These are ideal if you are planning on expanding your business area or setting up a new retail outlet. This type of commercial loan actually includes many smaller, more specific types. Permanent loans, for instance, work just like the first mortgage on your newly purchased commercial property.
Commercial Construction Loan
Very similar to the previous type, a commercial construction loan is used for putting up a new structure on a property that you might have just purchased or that you have had all along.
Commercial Auto Loan
Businesses that require the use of vehicles, for delivery, for instance, would benefit greatly from a commercial auto loan. This loan covers the purchase of cars, vans or pickup trucks. However, it does not cover large trucks like bulldozers and other construction vehicles. These can be addressed better through equipment financing.
Businesses in the construction industry require the use of large, expensive machines. It can be quite a substantial cost to cover with the cash you have on hand. Equipment financing is the answer to these issues. With several years in the repayment terms, this type of loan will not be that heavy of a burden.
If your business requires the upfront purchase of raw materials that will not convert into revenue until sometime in the future, inventory financing might be something that you can consider. This is practical in the manufacturing industry. You can get the money right away and pay only when your products are sold.
Business Line of Credit
A business line of credit has a lot of similarities with a regular credit card. The lender will not give you cash. Instead, they will give you a line of credit that you can access as needed. The maximum amount that you can borrow will depend on your qualifications as a borrower.
The great thing about this particular funding option is that you only need to pay interest on the amount that you actually use. Let’s say a month goes by that you did not need any extra funds. Then you don’t have to pay any interest at all for that month. Also, you have the assurance of knowing you have a line of credit that you can rely on in case of emergencies.
There are plenty of business loans that are offered by the US Small Business Administration. All of these loans were designed to help small businesses obtain funds for various purposes. The most common of these are the SBA 7(a) and the SBA 504 loans. These loans are offered by private lenders and backed by the SBA.
Important Things to Prepare before Filing a Commercial Business Loan Application
There are a few documents that lenders would want to see when evaluating your loan application. It is best that you put these documents in order ahead of time so that you can just present them when the lender asks for them.
For starters, you need to be ready with financial records, such as bank statements for the last two years, tax returns, balance sheets, payroll records, accounts payable and accounts receivable aging reports.
Lenders might also want to take a look at some legal documents that are pertinent to your business. This might include your permits and business licenses, a copy of your commercial lease, incorporation documents, and other legal contracts. They will also require a business plan, particularly one that explains how you are going to use the money that you are borrowing.
The Process of Applying for a Commercial Business Loan
Now that you understand what a commercial business loan is and what it is designed for, we can now go through the steps in the actual commercial business loan application.
The Pre-Approval Process
Before anything else, the lending company will first conduct an assessment of your business – annual income, financial history, debt status, and so on. They will also need to know the purpose of the loan right from the start. This pre-approval process will let the lender know how risky you are as a client, and how much money you will be qualified to borrow.
If you pass the pre-qualifying stage, you will then have to submit a formal commercial business loan application to the lender. You will have to fill out a form with information about your business. The form usually begins by asking about the loan you are applying for – the type of loan, the amount, your preferred term of credit, and the intended purpose of the loan. It will also require you to enter your contact details, including your home and work address.
Along with the accomplished form, you also need to submit financial statements and other business documents that the lender will ask for. Most lenders require records starting from 2 or 3 years before the date of application. A summary of the data on these reports will also need to be filled out in the form.
Review by a Loan Officer
Once you submit your requirements, all you have to do is wait for a loan officer to analyze your information. In addition to the business records that you have submitted, they will also check on your credit history, the present and expected revenue of your business, and the amount of collateral that you have at the moment.
Review by a Loan Committee
After it has passed the examination of the loan officer, your application will pass on to a loan committee. This is the entity that will ultimately decide whether your commercial business loan application is to be approved or rejected. Depending on the type of business loan you are applying for, as well as the specific requirements of the lender, this stage of the application might take anywhere from 1 day to a few weeks.
Term Sheet Presentation
The term sheet is a formal agreement on paper that states all the details of the loan. This includes details of all the parties participating in the deal, the amount of money to be borrowed, the fees, the loan purpose, and the loan interest. Fees might be charged to the borrower for appraisal reports and other third-party documents.
This is the part where all the application is finalized and sent to the underwriter for approval. Unless the underwriter sees any problems, you and the lender can now sign the loan contract and all other pertinent documents. Most businesses hire a closing agent to handle this part of the loan application and to finalize all the paperwork required. Soon after, the funds will be made available to you in accordance with the terms of the contract.
FAQs on Commercial Business Loan Application
How do I know if I’m qualified to make a commercial business loan application?
Each lender has their own set of qualifications so it’s hard to say right off the bat if you are going to qualify or not. In general, it would help if you have a decent credit score for both personal and business. Lenders might also consider the years you have been in business, your annual business revenue, your debt-to-income ratio, and so on.
What is the minimum credit score acceptable for a commercial business loan?
Again, the specific number depends on the lender. Traditional lenders like banks might look for a score of at least 680, while alternative lenders will be happy to work with you even if your score is less than 600.
Which type of lender should I approach for a commercial business loan?
For lower interest and higher security, banks and traditional lenders would be the best choice. But if you need faster funding or if your credit rating is not that high, you will find that online lenders offer a wide variety of viable options.
How long does it take to apply for a commercial business loan?
There are so many different kinds of commercial business loans available, and the time it takes to get approved is just as diverse as the loans themselves. It can be anywhere from a few minutes to several months.
Which type of business loan offers the lowest interest rates?
You can enjoy the lowest interest rates with the SBA 504 loan, which can be as low as 2.23% as of this writing. However, the requirements for these loans are pretty strict, and many small businesses simply do not qualify.
Many kinds of commercial loans are now widely available to all kinds of businesses. Even if you are just a small business or are just starting out, there will be a few loans out there that will be suitable to help your enterprise grow. If you are unsure of how to proceed, our loan experts here at Booster Financial can help you with the entire thing. From picking the right loans to taking each step in the commercial business loan application process, Booster Financial has got you covered. We can help you make the right financial choices and take your business to the next level.
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