Whether your company aims for commercial growth or seeks to understand what funding will be available for your business, a commercial loan will be an ideal option. Commercial loans are debt-based funding arrangements between firms and company institutions like banks.
Commercial loan: what is it and how to apply for it?
Whether your company aims for commercial growth or seeks to understand what funding will be available for your business, a commercial loan will be an ideal option. Commercial loans are debt-based funding arrangements between firms and company institutions like banks. They are usually used to fund large capital expenditures or cover operational costs that companies may otherwise fail to afford. Costly upfront expenses and regulatory hurdles sometimes prevent small businesses from directly accessing equity and bond markets for financing.
A commercial loan is usually granted to various business entities to assist with short-term funding necessities for operational costs or equipment purchases to facilitate effective and efficient operating processes. In some cases, the loan can be extended to assist the business in meeting more fundamental operational needs like payroll funding or supplies purchases used in the manufacturing and production processes. Unlike unsecured loans and lines of credit, a commercial loan requires businesses to post collateral in the form of equipment, property, or plant, which the bank or the lender can confiscate from borrowers in the event of bankruptcy or default. Cash flows generated from accounts receivable can also be used as a loan’s collateral.
Types of Commercial Loans
In most cases with businesses, one needs to spend a good amount of money to earn money. However, not everyone has the cash ready to take their business at a higher level. Companies can choose from several commercial loan types for the company’s equipment purchase or business expansion.
Commercial Real Estate (CRE) Loan
This loan type is used to purchase commercial properties. It can also be utilized by small businesses to renovate or expand their sites. CRE loans are typically created for investors like developers, corporations, funds, trusts, partnerships, and real estate investment trusts.
Under the umbrella of CRE loans are subtypes, including permanent loans and blanket loans. Aside from banks, a CRE loan can be availed through independent lenders, private investors, pension funds, insurance companies, and other capital sources like the 504 loan program of the US Small Business Administration. When evaluating a CRE loan, lenders consider the borrower’s financial ratio, creditworthiness, and the nature of the collateral.
Commercial Construction Loan
Unlike most loans which are typically structured so borrowers can receive the amount in total upfront, a commercial construction loan is not paid to borrowers in one lump sum. Most borrowers usually work with lenders to create a draw schedule. It will serve as benchmarks to draw amounts agreed on upfront for every step accomplished. This type of loan is specifically designed to cover the building and design structures that don’t exist yet.
Commercial construction loans will be ideal whether you plan to build an owner-occupied office area, multi-family real estate, or a business center.
Commercial Auto Loan
A commercial auto loan can be a good option for companies planning to buy vehicles for work-related transactions like visiting clients, transporting equipment, and completing jobs. Credit unions, banks, alternative lenders, and finance companies offer these loans. It is also best to remember that commercial auto loans are usually for average vehicles like vans, pick-up trucks, or vans. Suppose your business needs larger vehicles, and equipment financing may be an option.
Immediately purchasing equipment for your business can strain your cash flow, but you need them to perform daily business processes efficiently. Equipment financing can be an ideal solution to keep the business functioning or expand to meet the increasing demands. This type of loan is used to buy business-related equipment like a copy machine, vehicle, or restaurant oven. Like commercial auto loans, lenders might require the borrower a lien on the equipment, which will serve as collateral against the debt. Once the loan is fully paid, the borrower automatically owns the equipment without any lien.
Companies use inventory financing to pay suppliers for stocks that need to be stored and warehoused by selling them to customers. It is a kind of asset-based financing where companies turn to lenders so they can purchase the necessary materials to manufacture products they opt to sell on a later schedule. This type of loan is common to small and medium wholesalers and retailers that need a massive amount of available stock. Borrowers can use the inventory as collateral.
Bridge loans typically have higher interest rates than permanent loans. It is designed to fill the gap between long-term financing solutions and the needs of the business at the moment. Besides having a relatively higher interest rate, bridge loans are generally backed up by inventories and real estate as forms or collateral.
retailers that need a massive amount of available stock. Borrowers can use the inventory as collateral.
Business Line of Credit
This type of loan functions like a credit card, giving your business easy access to funds with a limit. Borrowers can withdraw funds as needed and only need to pay the interest on the borrowed amount instead of the total available amount. In some cases, lines of credit can be revolving, while some expire after a specific scheduled date. This loan makes it ideal for businesses that occasionally need funds for equipment purchases or cover operating expenses.
Term loans are generally designed for established small enterprises with good financial statements. The loan provides a borrower with a lump sum of cash in exchange for particular borrowing conditions. In exchange for the borrowed money is a repayment schedule with a floating or fixed interest rate. Some lenders may require a downpayment to reduce the repayment amounts and the total cost of the loan.
A Small Business Administration or SBA loan is partially guaranteed by the US SBA and issued by a participating lender, usually a bank. This type of loan has tight borrowing standards, but its low-interest rate and flexible terms make it one of the best ways to fund a business. The SBA program implements its set of intended purposes and eligibility requirements.
The SBA 7(a) loan program is the most common SBA loan program and is useful for supplies, anything real-estate, refinancing of business debt, and short and long-term working capital.
SBA 504 loan is designed for businesses wanting to purchase larger fixed assets like an office building.
Micro Loans offer a smaller loan amount of approximately $50,000 and are ideal for helping startups expand their business.
Business Uses of Commercial Loans
When your business needs funding, one ideal option is applying for a commercial loan. A few of the common uses of this type of loan include the following:
One of the most apparent reasons businesses need funding or decide to get a commercial loan is to expand business opportunities. When one’s business is booming, constantly growing it helps ensure that profits do not shrink or plateau. Expanding your business means additional costs for advertising, new property or building renovations, extra staff. Not all businesses have cash on hand to fund all these necessities. Loans allow you to cover expansion expenses without taking out your operational funds. This way, your company can continue providing service for your customers while growing the business.
Inventory is probably one of the most complex and challenging to manage expenses in several industries. The hard part lies in investing in products a business needs to carry even before customers buy them and eventually offsetting the cost. Once the business starts to operate, it needs to continuously expand and replenish inventory to keep up with the demands and provide excellent options to customers. This is even more challenging when your business needs seasonal inventory like winter coats. Your business can stay ahead of customer demands and trends through commercial loans without sacrificing the cash flow.
Another challenge for small businesses is the cash flow. It can be more challenging for companies that deal with customers who do not pay for products and services or when there is unsold inventory that needs moving out to accommodate new products. These concerns can even be more problematic when you include other regular inventory costs like utilities, staff, mortgage, and rent.
Commercial loans will provide funding that can be used for the business’s regular operating costs can help your business stay afloat, especially when profits are low. You continue to bring in customers and drive more revenue while covering up for other losses by keeping a smooth cash flow.
Regardless of the business type, every company has pieces of equipment to do the necessary tasks. This can include machinery or equipment which customers use, like a treadmill. They can be expensive, can wear down, and become outdated overtime. Unexpected expenses like the replacement or repair of broken equipment can break the budget and sometimes disrupt the business operating procedures.
Commercial loans help businesses manage the cost of equipment which allows smooth business processes and eventually provide a better experience for customers.
To Improve Terms on Larger Loans
Commercial loans can help improve a business’s credit history, especially if you plan on getting a larger loan for future business expansion or equipment upgrades. Once you pay off the first loan quickly and on schedule, it could mean that your business can strike better deals when you need larger loans in the future.
Qualifications for a Commercial Loan
Applying for a commercial loan can be a daunting process. However, if you prepare all the necessary documents beforehand, the process can be much easier. It is also ideal for businesses to create a checklist before applying. What will they include in the list?
Personal credit score
The credit score will generally be an excellent indicator of how responsible a borrower is with their business’s finances. Since your credit scores are numerical assessments of one’s history with debt, lenders can objectively assess how well you can handle the money they will lend for commercial expenses. Documentations will not be necessary as lenders can access information using whichever of the three various personal credit bureaus.
Business credit score
One’s business credit score is affected by several factors: length of credit history, credit utilization, business credit card payments, company size, and risk factors in the industry.
It’s already a given to provide basic personal information when applying for any loan. This includes your name, address, valid ID, and SSN, to name a few.
Business information and permits
This will include the entity type, business address, and employer identification number (EIN). Ensure you have all business licenses and permits ready, as lenders might also check for it to guarantee that your company is operating legally.
Personal and business tax returns
The tax returns serve to verify your business’s income and revenue which you first stated to the lender. When applying for commercial loans, lenders might typically ask for your business tax return, but it can also be handy to prepare your personal tax return just in case.
Recent banks statements
Business bank statements can reveal a lot about one’s financial insight as a business owner. The statements will determine whether or not the borrower has the liquidity to pay off the loan. Lenders usually require you to present a minimum of three months of your bank statements.
Profit & Loss Statement
Lenders will most likely ask for a recent copy of your profit & loss statement. This is another way to verify the revenue of your business.
Cash flow forecast
One of the indicators of a business’s financial health is cash flow. The cash flow forecast will help lenders see how you think the future of your business will look. Some lenders may even ask for 12-month projections, while others may request one or two months’ worth of cash flow forecasting.
Business debt schedules
These documents will give the lender insight into how a company pays off or plans to pay off its existing debts. The business debt schedule can include loans, leases, contracts, and other periodic payments the business owes to others.
Lenders would want to know what exactly is the money for. These funds will be spent for business purposes, but loans generally have explicit use cases such as equipment financing. You and the lender can ensure that the amount of money involved matches its purpose with a specific loan purpose.
This document will specify and spell out what the borrower uses as collateral for the loan to get approved. It will also provide a comprehensive overview of the borrower’s obligations to pay back the debt to the lender.
A business plan will give lenders a glimpse of what the borrower plans to do with the company. It has to be comprehensive and lay out the company’s purpose, strategy, and methods to be used to accomplish company goals. This is especially significant for new businesses that do not have much track record yet for lenders to see.
Commercial Loan Application Process
The application process for a commercial loan will depend on every lender. Some have longer processes, while others allow borrowers to undergo just a three-step process. Here is a list of general processes for commercial loan applications.
The lender, usually a bank or an alternative lender like Booster Financial, will start with the qualifying process by evaluating the borrower’s business income and financial history. The lender will also check any existing debt of the business and the loan’s purpose. The pre-qualifying process allows lenders to have a rough idea of how much the borrower’s business will be able to borrow and its riskiness.
Once the pre-qualifying process is done, the borrower must complete and submit a loan application. The loan application must come with financial statements dating back at least three years. The documents will prove that the borrower’s business is capable of repaying the loan
Loan application package review
There will be a loan officer or representative of the bank to assess all the submitted documents with due diligence. The officer usually investigates things like available collateral, credit history, present, and projected business income. Financial analysis will also be another significant aspect of the review process.
Suppose the loan officer sees that the loan application is deemed appropriate, a complete and formal credit application will be submitted to a loan committee or loan adjudicator. They will then review all the relevant information and decide whether to approve or reject the loan request. Generally, the process can take about a week. The business may be asked to provide additional documents during the evaluation process.
The assigned officer for the loan application will present a term sheet. This happens when the loan request is approved. Term sheets are formal documents outlining the amount of the loan, parties involved, the purpose of the loan, fees, the collateral used, and the interest rate. After reviewing the document and signing the letter of intent, a payment might be needed for third-party reports like an appraisal report.
Loan package and closing paperwork
Once the third-party reports are accomplished, the loan application package will be resubmitted for final approval. Once approved, the business will then sign the finalized loan documents. Businesses will have a closing agent tasked to handle all the closing paperwork and complete any remaining documentation.
Advantages of Commercial Loans
Businesses widely prefer commercial loans due to providing entrepreneurs with various significant incentives, including the following:
Commercial loans have the lowest interest rate of all the loan options available, enabling businesses to access crucial funding while keeping lower overhead costs.
The loan is long-term, generally between three and ten years, allowing borrowers to pay the money back gradually while working to increase business profits.
Extended payment plans and lower interest rates minimize the possibilities for default, which also reduces investment risk.
Commercial loans may involve large sums of money, allowing borrowers to cover the bulk of startup expenses with a single loan.
Borrowers will retain complete ownership of their company.
With flexible and long-term payment options and lower interest rates, commercial loans generally are cost-effective for businesses.
Commercial loans also provide cash flow boost needed in investing in equipment purchases, meeting payroll, and shouldering other business expenses.
Drawbacks of Commercial Loans
Commercial loans may have one of the lowest interest rates and flexible payment options; they also share some downsides, which borrowers must note.
The funding can be difficult to qualify for and might require an impressive business credit. Startups and first-time business owners are unlikely to be qualified and might have to build solid credit before applying for commercial loans.
The application process can be exhausting, and a detailed financial business report might be necessary. Lenders might also require borrowers to submit an accurate assessment of the projected revenue and detailed data of all possible business risks. These requirements basically tell you to formulate a highly compelling and comprehensive proposal that will assure lenders and bankers that there is a relatively lower risk of business failures.
You need to provide personal financial histories like credit score, unpaid debts, and annual income. These must be accurate and valid as even slight problems with the financial history can cost the rejection of the loan request.
A commercial loan offers lesser personal autonomy than other loan options. Larger loans even require detailed accounts of how the fund will be spent.
Since commercial loans require collateral if the borrower defaults on the loan, the lender or the bank has the right to seize and take ownership of the property used as collateral.
Tips to Get an Approval for a Commercial Loan
How can a borrower ace their application with all the benefits and limitations of commercial loans? Here are some tips that can be helpful in the process.
Borrowers must know the ins and outs of their business before setting up an appointment with a lender. Identify the needs of your business and specify how the commercial funding can help your business reach the succeeding phases of growth. It is also essential to understand the repayment terms that your business can afford, the exact amount you need, and the lending products that best fit your business.
Know your credit score
Your personal and business credit scores are two of the essential factors lenders will look at when evaluating your application for commercial loans. Ideally, the credit score must be at a minimum of 700 for a better chance of loan approvals. The higher the credit score, the more edge you have when it comes to negotiating to secure lower interest rates and favorable terms. Suppose your business is new; you may not have an established business credit score yet. In this situation, personal credit scores have more weight.
Prepare the necessary documents.
There are several documents one needs to prepare to apply for a commercial loan. The best approach is to secure all these documents ahead of time to avoid any conflicts once you decide to sit down with a lender. The documents may include profit and loss statements, bank statements, balance sheets, business licenses, tax returns, and cash flow statements. In most cases, lenders will also ask to see at least two years of business history.
Devise a business plan
Lenders might also want to see the borrower’s business plan. This document details business goals and your strategies to achieve them. It must include information about your business, industry, strategies, objectives, and financial projections.
FAQs on Commercial Loans
How can I qualify for a commercial loan?
Getting the nod from lenders for a commercial loan depends on your ability to pay back the loan. They generally concentrate on various factors to figure out your eligibility. An impressive credit score is crucial, and it is essential to demonstrate consistent cash flow. Ensure to clearly explain why you need financing and how you will adapt to possible worst-case scenarios. For their part, lenders want to see that borrowers are meticulous, organized, and present all the documents thoroughly.
ow much is the minimum down payment for commercial loans?
The type of lender and the borrower’s financial history play a significant role in whether or not there will be collateral or a minimum down payment for commercial loans. Most lenders want to know that their borrowers are motivated to repay the loan and ensure they hold utmost responsibility for their loan. Consequently, they may require a down payment or collateral.
The minimum down payment for a commercial loan usually plays around 0-20%. Suppose you purchase equipment, real estate, or vehicles; the products or properties will serve as collateral.
How do lenders determine commercial loan rates?
Most lenders base their rates on two main factors – the borrower’s business and personal finances. Suppose the commercial loan is specifically for the purchase of the real estate, renovation, or construction. In that case, the lender might also consider the property’s value for which the loans will be used.
Is a commercial loan right for you?
It will always depend on the condition of your business, the challenges you are currently facing, and strategies and solutions for any hurdles in your business. Before deciding on submitting that loan application, it pays to take a hard, long, and realistic look at your business and the issues you are looking to overcome.
Once you have a clear picture of where your business currently stands, where you want to become, and the funding solutions that might help your business get there, it is recommended to talk to a commercial finance officer to get guidance and loan options.
What companies should consider commercial loans?
Commercial loans are ideal for mid-sized businesses, specifically those with $10 million or more in revenue every year. Some industries which usually apply for commercial loans include construction, agriculture, beauty and wellness, trucking, restaurants, retail, and medical business. Looking at the list, it is a broader range that includes various business types.
Where to get commercial loans?
You might think immediately of going into the bank to apply for a commercial loan. However, there are several lending options where you can secure commercial loans, including:
Banks. They usually provide long-term options and good rates to keep the borrower’s payments reasonable for their business. However, banks can be selective, and getting a loan approval can be exhaustive and longer.
Commercial lender. This type of lender is not a bank but is capable of issuing and approving loans. Borrowers can expect faster approvals and lower costs than banks. However, the interest rates are significantly higher, and the loan can be a short-term one.
Crowdlending. This usually happens on marketplaces where lenders and borrowers are matched according to their needs. Engage at your own risk as this platform implements a few regulations.
Hard-money lenders. These lenders offer short-term loans, which private companies typically dole out. They only require a little time and a few documents for approval. If you wish to reach out to these lenders, be aware that they usually impose higher interest rates.
Where can I find an excellent commercial loan?
An excellent commercial loan can vary from borrower to borrower. You can always look for commercial loan providers to meet your business financing needs. Booster Financial is one of the online lenders that can accommodate various businesses and provide financing options for your company. Researching for that lender that best fits your business is essential.
Regardless of how accessible commercial loans are, it can still be beneficial to research before diving into a lender. Sure this type of loan provides various advantages for companies that need expansion. With a better comprehension of your business needs and working with reputable lenders, you can get the funding to keep your business growing.
Just ensure to take note of the terms and conditions of the loan so you will not have any issues as you go along with the repayments. Remember that payment inconsistencies can later affect your credit score and might hinder you from getting larger loans in the future.
Understand Your Options
Find out more about the different finance opportunities available in your area and get funded today!