Do you think that a commercial loan is the best loan to apply for? We have researched in-depth what a commercial loan is all about, how to qualify for a commercial loan, how a commercial loan works, how to apply for a commercial loan, commercial loan rates, etc.
What Is A Commercial Loan?
Many webmasters have defined what commercial loan is all about and according to Wikipedia, A commercial loan and industrial loan (C&I loan) is a loan to a business rather than a loan to an individual consumer.
These short-term loans may have an interest rate based on the LIBOR rate or prime rate and are secured by collateral owned by the business requesting the loan.
According to Investopedia, A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank.
While Corporate Finance defined a commercial loan as a loan that is extended to businesses by a financial institution.
Commercial Loan Requirements?
As with any loan application process, borrowers are asked to provide information and certain paperwork to demonstrate the business’s eligibility for a loan.
Some of this information is simple enough – you will need to provide contact information for you and your business, for example – but other pieces of information will likely require more planning and preparation on the part of the applicant.
It’s also worth noting that the requirements for a commercial loan can vary from one financial institution to another, so be sure to ask your lender what they will need from you well in advance.
According To CustomerBank, Some common requirements for obtaining a commercial loan include the following:
- Good credit score(s): Since loan eligibility is often based on an applicant’s credit history, it’s essential for a lender to know your credit score and that of your business, too. Both numbers may be taken into account when applying for a commercial loan. Lenders often gauge the 5 C’s of credit- character, capacity, capital, collateral, and conditions- to assess the creditworthiness of potential borrowers.
- Proof of Collateral: While not required for all loans, there are some instances where a business will need to show proof of collateral that they can put up in order to secure a loan.
- Evidence of revenue: Annual revenue and profits are one of the most common small business loan requirements across different lenders. Typically, lenders require businesses to share profit and loss statements from the past three years, if available.
- Loan use documentation: While some loans carry few requirements regarding how the funds are used, others have strict rules. A commercial mortgage, for instance, might stipulate that the money be spent on the acquisition or improvement of the property; similarly, a government-guaranteed loan backed by the U.S. The Department of Agriculture could require that the funds be used in a rural community.
- Business Plan: While not required for all loans, there are instances where a lender will ask for a business plan or loan proposal from the borrower. When applying for a commercial loan, lenders are interested in learning about the business overview and history as well as why the loan is needed and how it will help the business.
Types Of Commercial Loan
There are several unique commercial loans that business owners can take advantage of. Whether you are looking to purchase office space or need funds for the next phase in your business strategy, here are your main options for types of commercial loans to choose from.
• Commercial Real Estate Loan
As the name implies, a commercial real estate loan is used to purchase commercial property. You can use these commercial mortgage loans to buy real estate as business space or to buy properties as an investment.
Under the umbrella of commercial real estate loans, you will find even more sub-types, including permanent loans, which act as a first mortgage on a commercial property. Others, like blanket loans, property loans are designed to cover the purchase of multiple properties. Local commercial lenders can work with you to come up with a loan that fits your unique business needs.
• Commercial Business Line Of Credit
A business line of credit is a type of commercial loan that shares many characteristics of a credit card. Instead of getting your funds in one upfront lump sum, you will qualify for a maximum amount. You can then draw funds from your line of credit as you need them. The best part about this is that you pay interest only on what you use— not for the maximum amount. This makes a line of credit great for businesses that may occasionally need funds to cover operating expenses or to purchase equipment as they go.
• Equipment Financing
Your line of business may require that you own large pieces of equipment to produce your products or conduct your service. Equipment can come with a hefty price tag that you can’t cover with cash on hand. Instead of buying your equipment outright, you can finance it through a loan. This means that you can pay for it over time— with interest payments included, of course. Many times, the equipment itself will serve as collateral for the loan, which makes this type of loan easier to qualify for than others. However, if you default, the bank can seize your equipment.
• Commercial Term Loan
A business term loan is a flexible loan with a consistent repayment schedule. Some general characteristics of this type of loan include:
- A set loan term in which you must repay what you borrowed, which is usually one to five years but can be longer or shorter
- A fixed or variable interest rate
- Few restrictions on what the money can be used for. Because you can use the money however you see fit in your business, a term loan is great if you have different areas of expenses to cover.
• Commercial Construction Loan
A commercial construction loan is similar to a real estate mortgage. The difference is that a construction loan is designed to cover designing and building a structure that doesn’t exist yet. So whether you have a vision for a brand new owner-occupied office space, a business center, or a towering multi-family real estate investment, a commercial construction loan would be the product to make it happen from scratch.
• Commercial Auto Loan
Some businesses need vehicles for business-related operations. These can be purchased with a commercial auto/vehicle loan, which is similar to a consumer auto loan.
Because vehicles depreciate so quickly, many financial institutions will only offer car financing on newer vehicles, which is important to remember when building your fleet.
Also keep in mind that this type of loan is best for average vehicles like cars, vans, or pick-up trucks. If you need financing for a larger vehicle, such as a semi-truck, equipment financing may be the better option.
• Commercial SBA Loan
The U.S. Small Business Administration (SBA) has several loan programs that small business owners can apply for. Each SBA program comes with its own set of intended uses and eligibility requirements.
SBA 7(a) loans: The 7(a) is the SBA’s most common loan program and can be used for anything from real estate, short- and long-term working capital, refinancing business debt, and supplies.
SBA 504 loans: 504 loans are designed for businesses that are purchasing major fixed assets, such as an office building, that will help grow their business.
Microloans: These loans are smaller with a maximum size of $50,000 and are meant to help small businesses start up and expand.
SBA loans aren’t actually funded by the SBA themselves.
They guarantee the loan; the funds are provided through other parties. For example, you would apply for a 7(a) loan through your local lender who participates in the program, and the SBA would back the loan.
A certified development company would provide an SBA-backed 504 loan, and SBA microloans are funded through intermediary lenders that partner with the SBA.
• Commercial Bridge Loan
Bridge loans are designed to fill the gap between what a business needs at the moment and a longer-term financing solution. These shorter-term loans have higher interest rates than permanent loans, but allow businesses to meet immediate obligations by providing a temporary cash flow. This type of loan is most often used in commercial real estate loans.
• Commercial Inventory Financing
Sometimes, businesses need to purchase products upfront that will not be sold until later. For example, if you have a clothing line, you may purchase materials upfront in bulk, even if your designs won’t hit the shelves all at once. Inventory financing is designed to help cover these costs. The loan is backed by the inventory as collateral. Invoice financing can be a risky endeavor for financial institutions, which is why these are usually approved on a case-by-case basis.
• Commercial Merchant Advance Loan
This is a lump sum of money that is repaid with a certain percentage of credit card transactions within the business each day. This is considered to be one of the most expensive of all commercial loan options and should only be utilized by those who are unable to obtain other types of financing.
• Commercial Fishing Loan
Commercial fishing loans cover vessels and all types of fishing and processing gear or financing for the purchase of Individual Fishing Quotas (IFQs). Loans will be structured to fit the seasonal nature of the business.
Who Can Offer Commercial Loans?
For smaller business loans, major banks are more likely to compete directly with each other to lend to you. Commercial business loans often have a broader range of challenger banks and independent lenders who compete on speed, service, and flexibility.
Letter Of Credit: Documentary and standby letters of credit are arrangements often used by import/export businesses, contractors, and travel agencies to serve as an assurance of payment.
Documentary letters of credit are usually for less than six months. A standby letter of credit may be renewed annually.
A letter of credit serves as a guarantee that the vendor you’re working with will get paid. You apply to your bank or credit union for a letter of credit using cash, real estate, or other business assets as collateral.
Once you’re approved, your lender will draw up an official letter of credit with a specific dollar amount guaranteed to a specific vendor. If you are unable to pay that vendor, your lender is obligated to do so and will use your collateral to cover the amount.
How To Get a Commercial Loan?
While you may immediately think of a bank for where you should go to get a commercial loan for your business, there are other options. Here are some details about banks and other options for lenders:
Banks: Banks typically provide good rates and long-term options to keep payments reasonable for the business. However, they tend to be more selective and the process for acquiring a loan is longer.
Commercial lender: A commercial lender is not a bank, but is still able to issue loans. You can expect lower costs and faster approval compared to banks, but the interest rates are usually higher and the loans are short-term.
Hard-money lenders: Private companies usually dole out hard-money loans, which are short-term and require little time or documentation for approval. However, these lenders typically charge higher interest rates.
Crowdlending: Crowdlending happens on marketplaces where borrowers and lenders are matched according to need. There is little regulation on these platforms, so engage at your own risk.
Commercial Loan Interest Rate
The average interest rate on a commercial real estate loan is about 2.2% to 18%. The actual commercial loan interest rate you secure depends on the type of loan you choose, your qualifications as a borrower, and the type of building or project you’re financing.
Commercial Loan Calculator
Calculate how much a business loan will cost your business using a commercial loan calculator today. Using everyday cash for projects that aren’t every day is a common mistake entrepreneur make. This can put a lot of stress on your cash flow, especially if your business hits an unexpected bump. A better strategy is to use a business loan calculator for your growing projects.
Commercial business loan calculators will help you to calculate your monthly payments and the interest cost for financing your project. Additionally, you will have the option to view and print a complete loan amortization schedule.