Commercial loans can be a crucial source of funding for businesses, allowing them to expand, renovate, or cover unexpected expenses. There are several types of commercial loans available, each with its own unique characteristics.
A line of credit is a type of commercial loan that provides a revolving credit limit, allowing businesses to borrow and repay funds as needed. This can be a flexible option for businesses with fluctuating cash flows.
Businesses can use a commercial loan for a variety of purposes, including purchasing equipment, renovating a property, or funding a new project. The loan amount and repayment terms will depend on the lender and the business's financial situation.
Some commercial loans are secured, meaning the business must put up collateral, such as property or equipment, to guarantee the loan. This can provide a lower interest rate and more favorable repayment terms.
Types of Commercial Loans
Commercial loans can be a crucial source of funding for businesses, but did you know there are several types to choose from? These loans can be tailored to meet the specific needs of your business.
A commercial loan is often thought of as a short-term source of funds, with a typical term ranging from three to five years. This type of loan is commonly used for commercial real estate, known as mini-perm loans.
Some commercial loans are meant for specific purposes, such as equipment financing. These loans can help you purchase large or highly specialized equipment for your business. Commercial real estate loans, on the other hand, can help you buy or renovate property.
Commercial auto loans are used to buy vans, trucks, or other vehicles for your business. Commercial construction loans finance new building projects or major renovations. Commercial bridge loans are a type of short-term financing used in commercial real estate to take advantage of an immediate opportunity.
Here are some common types of commercial loans:
- Commercial real estate loans: These loans typically require at least 20% down and may have unusual loan structures, such as balloon payments or shorter term lengths.
- Commercial auto loans: These loans provide funding for delivery vehicles, employee transportation, and more.
- Commercial construction loans: These loans offer funds available on a draw schedule to pay for construction costs, including land.
- Commercial bridge loans: These loans are short-term and designed to cover gaps between paying for high-value business assets and securing long-term funding.
- Commercial hard money loans: These loans are short-term and based on the value of an asset, usually real estate, rather than the business's creditworthiness.
- Commercial equipment financing: This type of financing is used to acquire business equipment, such as factory or construction equipment.
Commercial hard money loans and commercial bridge loans are often used for short-term needs, while commercial construction loans are used for longer-term projects.
Commercial Loan Process
Applying for a commercial loan is no different than applying for another business loan. The process can vary from lender to lender, but here's an overview of what to expect.
You'll need to gather paperwork and apply, assembling necessary documentation like financial statements, business plans, tax returns, bank statements, and business licenses and formation documents.
These supporting documents will likely need to be submitted alongside your loan application.
How to Get
To get a commercial loan, you'll need to gather all the necessary paperwork, including financial statements, business plans, tax returns, bank statements, and business licenses and formation documents.
Assemble these documents carefully, as they'll be submitted alongside your loan application. This is a crucial step in the commercial loan process.
Once your loan application is approved, review the loan's closing documents, which include the final loan terms, repayment schedule, and any additional obligations, such as providing annual financial statements or signing a personal guarantee.
Make sure you understand all aspects of the loan before signing the closing documents, as this will ensure you're aware of your responsibilities and commitments.
Traditional Banks
Traditional banks are likely the best fit for businesses with strong financial profiles and well-established operating histories.
They generally offer the most affordable interest rates, making them a cost-effective option for businesses that qualify.
However, traditional banks can be quite strict in their qualifying criteria, which may not be suitable for all businesses.
They also tend to have longer funding times compared to online lenders, which can be a drawback for businesses that need quick access to capital.
In exchange for these benefits, traditional banks offer a level of security and stability that many businesses find reassuring.
Commercial Loan Options
Commercial loan options are numerous, and understanding your choices can make a significant difference in securing the right financing for your business. You can use a commercial loan calculator to find the best lending option by comparing lenders and various lending scenarios based on loan amounts, terms, and rates.
There are several types of commercial loans available, including SBA loans, which are backed by the Small Business Administration and offer a guarantee to reduce lender risk. SBA loans can be used for various business purposes, including purchasing equipment, managing operational expenses, and consolidating debt. They are available up to $5 million and have terms ranging from 10 to 25 years.
If you're looking for a smaller loan amount, microloans are available up to $50,000 and are accessible to businesses with limited credit history or collateral. You can find commercial loans through various sources, including banks, online lenders, and Certified Development Companies (CDCs). It's essential to choose a commercial loan that suits your business needs and to apply for the right loan, which can be done with the help of an SBA-approved lender.
Here are some popular commercial loan options:
- SBA 7(a) loans
- SBA 504/CDC loans
- Microloans
Multi-Purpose
A commercial loan can be a versatile tool for businesses, providing access to funds that can be used for a variety of purposes. You can use a business line of credit to account for seasonal revenue disruptions, purchase inventory or supplies, or cover other expected or unexpected gaps in cash flow.
Lines of credit can be obtained from traditional lenders, online lenders, and even some private lenders, with rates and terms varying widely. Borrowers can typically access between $5,000 and $250,000 with rates between 6% and 20%.
One type of commercial loan that's worth considering is a blanket loan, which allows you to consolidate multiple mortgages into one loan. This can make payment easier and reduce administration costs.
Blanket loans are available through traditional and commercial lenders, and online lenders are increasingly offering this type of loan. You can typically expect terms between two and thirty years with rates between 4% and 11%.
If you're looking for a loan that's guaranteed by the Small Business Administration (SBA), you can consider an SBA loan. These loans are backed by the SBA and approved and originated by lenders, and they have a guarantee that makes lending less risky for the lender.
SBA loans are available up to $5 million, with terms of 10 years for working capital, inventory, or equipment loans, and up to 25 years for real estate loans. Rates are based on an acceptable spread of the current prime rate, interbank rate, or SBA Peg rate, the loan amount, loan term, and your credit profile.
Here are some benefits of SBA-guaranteed loans:
- Competitive terms: SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans.
- Counseling and education: Some loans come with continued support to help you start and run your business.
- Unique benefits: Lower down payments, flexible overhead requirements, and no collateral needed for some loans.
Ultimately, the right commercial loan for your business will depend on your specific needs and circumstances. Be sure to do your research and compare different options before making a decision.
Vendor Credit
Vendor credit can be a valuable tool to help you free up cash flow for other expenses.
Many vendors offer payment terms such as net-30, net-60, and net-90 days, giving you time to turn goods or services into tangible profits before you need to pay the invoice.
Paying early can also earn you a discount, with some vendors offering a discount to those who pay within 10 days.
This type of arrangement can help you build a strong business credit profile by reporting your good credit history to business credit bureaus like Dun&Bradstreet, Experian, and Equifax.
Better business credit will make it easier to secure affordable financing in the future.
Mortgage or Real Estate
A commercial real estate purchase can be a significant investment, but it often requires a long process for financing. A real estate bridge loan can provide the necessary capital to make a purchase quickly, typically ranging from a few months to a few years.
This type of loan is designed to "bridge" the gap between the need for funds and the availability of long-term financing. Business owners can use it to take advantage of a real estate opportunity, relocate their business, or renovate a property to increase its value.
A real estate bridge loan is usually repaid quickly once pending capital becomes available. However, in some cases, borrowers may need to refinance their loan through another, more affordable option, such as an SBA loan.
Frequently Asked Questions
How are commercial loans repaid?
Commercial loans are typically repaid through fixed monthly payments over a set timeframe, which can range from one year to 25 years or more. The repayment term can be chosen by the business, and in some cases, the loan is secured by collateral.
How much do you have to put down for a commercial loan?
Typically, commercial loan minimum down payments require 20-25% down, but some programs may vary. The exact amount may depend on the loan type and your specific situation.
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