Commercial loans are available to a wide range of commercial enterprises, generally for short-term funds required for operational expenses or the purchase of equipment to assist in the operation process.
Borrowers that take out working-capital loans must generally deposit collateral, which is often in the form of real estate, plant, or equipment that can be seized by the lender if the borrower goes bankrupt or defaults.
The future income from accounts receivables may be used as collateral for a loan.
In this article, we’ll be discussing all the types of commercial loans, advantages, disadvantages, and should you apply or not.
- Types of Commercial Loans
- Advantages of a Commercial Loan
- Get The Loan Comparison Calculator
- Disadvantages of a commercial loan
- What distinguishes commercial loans than other types of business loans
- Frequently Asked Questions
Types of Commercial Loans
Lenders categorize commercial loans based on their intent and how they will be repaid.
Some of the most popular alternatives on the market today include:
1. Term loans
These are traditional loans with set monthly payments.
You choose how much money your firm requires and how long you want to pay off the business loan when you submit an application.
It might take anything from a 2 years to more than 25 years, depending on the value of your case.
The interest rate for your loan and the total monthly payments will be determined by the lender.
You may also like: 4 Options To Get Startup Business Loan With No Revenue
2. Short term loans
Short-term business loans are for small amounts of money that you repay within 18 months or less.
In return, these loans have a faster and less technical approval procedure than a long-term business loan.
There are several lending options accessible to businesses, and many of them have one-day approval.
Frequently, they’re used to restock inventory, pay bills, make ends meet in the case of a unforeseen repair, and a variety of other day-to-day activities.
3. Equipment loan
You can use these loans to buy a high-ticket item, such as a piece of equipment, or other business assets.
With asset-based equipment loans, you may be able to obtain a loan simply by presenting the assets themselves, allowing your company to avoid having to pledge any additional assets.
You may also like: How To Refinance A Business Loan In Just 4 Minutes
4. Commercial real estate loan
Businesses that want to expand or acquire new properties, such as a new or second office, warehouse, or manufacturing plant, may get larger loans.
Loans for large sums of money and lengthy terms are available in the commercial real estate market.
They are also secured by the real estate that your company is acquiring.
5. Line of credit
The amount you can borrow using a commercial line of credit is determined by the lender (which is usually $100,000).
You can borrow up to this amount at any time. You may subsequently borrow again once you have repaid the cash.
It’s not a one-time loan, but rather an option to borrow at your leisure.
You may also like: How to Get a Business Acquisition Loan
6. SBA commercial loan
The Small Business Administration (SBA) offers commercial loans to small businesses.
They provide comparable commercial loan alternatives, such as term, real estate, and lines of credit.
The SBA does not fund individual entrepreneurs directly, but it does guarantee the repayment of a company loan.
You borrow from a bank or a private lender, and if your company fails to repay its obligations, the SBA will cover some of the damages.
Despite the fact that the SBA has a name suggesting small company, its loans and assistance are big enough to help medium-sized firms seeking for corporate finances.
You may also like: What Is a leveraged loan? And Is It Best For You?
Advantages of a Commercial Loan
1. Maintain Ownership of Your Company
In the short term, selling equity in your firm to raise cash may appear to be a more cost-effective alternative than taking out a business loan.
However, there are some drawbacks to this financing alternative.
Many small company owners have found themselves on the outside looking in on their own business after obtaining equity.
A business loan might help you maintain control of your firm by making it owner-occupied rather than having investors or board members dictate your fate.
You’ll still have more working capital, but you won’t lose control of your company that you’ve worked so hard to create.
2. Large Amounts of Money Are Easily Available To You
Small company owners are frequently unable to access debt or equity capital due to financial constraints.
Typically, they don’t have the connections to seek venture capital funding.
Because of this, maintaining a business can be very costly and hazardous.
With a company loan, however, you may pay for all of your startup costs with just one loan.
It also makes it a lot easier for business owners who don’t have a lot of money to raise a significant amount of capital.
Furthermore, by linking all of your financing into one loan, you’ll have a smoother process.
You may also like: Business Loan vs Personal Loan: Which One Suits You?
3. Provides a Financial Boost by Increasing Cash Flow
Irregular revenue sources are one of the most prevalent cash flow issues for small company owners.
However, irregular revenue streams do not have to be a problem when taking out this sort of small company loan.
A commercial loan is a type of loan that you may apply for to finance equipment, pay staff, buy a new warehouse, or cover other business costs.
A commercial business loan opens up the possibility of expanding your company all year round in a high-seasonal or long payment industry.
In many cases, business owners find themselves in a bind when they do not have sufficient cash flow.
If you obtain commercial financing, on the other hand, you will have plenty of cash flow.
You may also like: Is it better to apply online vs in person for a loan?
Disadvantages of a commercial loan
1. Default Risk
A business loan is not risk-free, which is why you should consider the risks of defaulting on a commercial business loan.
Keep in mind: Unsecured and secured commercial loans are two types of business loans that may be obtained.
If you default on a secured loan, you may lose significant assets.
Even if you don’t have a secured loan, your lender might sue you.
Even if you pay off your debt, defaulting on a loan (or even making late payments) will damage your company credit score.
It may have a negative impact on your personal credit score in some situations.
2. Limited Flexibility
With a commercial business loan, you’ll need to know exactly what you’ll do with the cash and how you’ll pay it back.
The conditions of a commercial business loan, like those of a merchant cash advance, business line of credit, or equipment loan, are not adjustable.
Instead, you’ll borrow a certain amount of money for a set length of time, make regular payments over that period, and be required to return the loan at a specific point in time.
If your firm’s income is subject to swings, making a monthly payment may not be desirable.
Finally, if you’re not sure how much money you’ll need, a business loan from a commercial lender may be prohibitively expensive, and if interest rates are high, you could end up paying interest on money that isn’t required.
You may also like: Which Document Represents The Borrower’s Promise To Repay The Loan
3. The lengthy paperwork and loan application procedure
When applying for a business loan, you’ll have to provide plenty of documentation.
When applying for a business loan:
You’ll be expected to submit 2 or 3 years of tax returns, financial statements, accounts receivable and accounts payable documents.According to the Small Business Chronicle
Most requirements for a business loan include obtaining a credit decision. As a result, if you have bad or little credit history, you may not be accepted for this financing option.
You may also be asked to give a short speech during the interview.
You’ll need to explain your firm’s goals and objectives, as well as anything else.
It’s also a smart idea to have an overall concept of your short and long-term corporate strategy.
Commercial lenders will examine these materials and your presentation to determine if you are eligible for their financing.
They’ll calculate your loan amount based on this information if you qualify.
What distinguishes commercial loans than other types of business loans
Commercial loans are distinguished from other forms of borrowing by the amount of money that may be borrowed.
Small company loans generally have a maximum limit of $100,000. A commercial loan may be as much as $500,000 or more.
Larger loan amounts allow lenders to be more flexible in terms of payment terms and conditions.
A balloon payment plan is one example of a lump sum payment. You may pay less per month in exchange for making a larger total payment at the end.
Finally, obtaining a business loan might be more difficult since the lender is providing more funds and the stakes are higher.
The method for obtaining a loan varies depending on the lender.
A traditional lender will require a more formal, lengthier application procedure than an internet lender, who will just need to verify your income.
However, in order to qualify for a business loan, you must be able to show higher earnings, a longer track record, or more collateral than you would need for a small-business loan.
You may also like: What is a loan maturity date? And What Will Happens If You Don’t Pay?
Frequently Asked Questions
Small loans are typically provided at lower funding amounts, whereas commercial loans have larger funding amounts made to medium-sized and larger enterprises.
A bank or another financial institution will generally be required to give approval for any business seeking a commercial loan.
– Schedule of Sources and Uses.
– Loan Amount.
– Your Requested Terms (such as fixed/variable interest rates, term length, amortization, and recourse)
– Your financial statements, as well as your liquidity, will be verified.
– Real Estate Resume.
– Annual financial reports, such as the company’s annual report and/or tax returns
A credit score at 695 or higher is considered excellent by most commercial lenders, but not exceptional.
The SBA and term loan minimum credit score is generally around 680.
The terms of commercial loans, unlike residential loans, vary widely and can range from 5 years (or less) to 20 years. The amortization period is frequently longer than the loan’s term.
For example, a lender may provide a commercial loan with an amortization period of 30 years for 7 years.
No, you are not able to do so. Because some company owners commit the error of using money from a business line of credit to pay for personal expenses.
If a lender discovers that a business owner is utilizing a business line of credit for personal use, he or she will call in the outstanding balance on the note.
Mathew is a financial writer with more than 3 years of experience educating his readers to achieve their financial goals. I begin by first understanding an individual or organization’s current income/expenditures and financial aspirations. Then, I suggest loan options, most suited to their goals