Commercial Loan Basics: What Small Business Owners Need to Know When Seeking Alternative Financing

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For small businesses that want to level up or satisfy working capital needs, commercial loans are the way to go. However, given the current pandemic uncertainty, business owners should carefully consider their borrowing options.

Here’s the who, what, where, when, and why on commercial lending:

Who typically uses commercial loans?

Commercial loans are best for small to midsize companies. Smaller companies are less likely to have access to equity financing options, and therefore must rely on other lending vehicles. Commercial loans are often talked about as a separate product from small business loans, which are generally used for smaller amounts. They provide financial stability for small businesses while also providing quick access to capital sources so companies can grow and expand.

What are the different types of commercial loans?

Depending on your business needs, different lenders offer various loan products. You should evaluate the financial goal for your company and seek out a lender who offers that specific loan option to help you.

Term Loans

Term Loans are classic loans paid in monthly installments over a predetermined period of time, anywhere from one year to up to 30 years. Interest rates may be fixed or floating. Sometimes these loans may be fully or partially amortized, and others may be interest only. Typically, the longer the loan term, the more likely the loan is to have an amortization component.

Commercial Bridge Loans or Short-Term Loans

Commercial Bridge Loans or Short-term Loansaremeant to provide a quick injection of capital to address temporary needs. The repayment period is short, as their name implies, typically under a year to 18 months, and interest rates are high. Businesses often use these loans to cover costs like payroll and inventory when cash on hand is low.

Lines of Credit

Lines of Credit are flexible loans that work almost like credit cards. Lenders approve a credit limit for businesses, and they can draw on it at any time up to the maximum. Once it’s repaid, businesses can use the line of credit again.

Equipment Loans

Equipment Loans are loans used to purchase equipment, in which the equipment itself becomes collateral for the loan. These loans often require a down payment.

Commercial Real Estate Loans

Commercial Real Estate Loans are used to buy new business property and are secured by the property.

SBA Commercial Loans

SBA Commercial Loans are similar to the aforementioned lending products, but offered through the Small Business Administration. These are typically easier to qualify for and provide some coverage if your business can’t cover the loan, but these loans will require businesses to pay a fee to the SBA. Businesses who go the SBA route will still work with private lenders who are approved by the SBA.

Where do you get a commercial loan?

Banks and credit unions are the traditional commercial loan lenders, but they usually have the most stringent requirements. Small businesses rejected by traditional lenders may qualify for similar loans through the SBA. Many businesses may also choose to work with alternative lenders online, including high net worth individuals, mortgage funds, and other financing sources.

When you apply, what is required?

Requirements vary depending on the loan size, loan product and the lender. Important factors include good credit, business revenue, collateral, financial statements like tax returns and a business plan describing how your company will use the loan. Typically, as the lending source becomes less traditional and more alternative, the lending requirements will also change to accommodate for the capital source. Some borrowers with a poor credit history may not qualify for bank loans due to their underwriting requirements. A great alternative for them is to seek private lenders who may overlook their credit history in favor of other underwriting requirements, such as the loan-to-value ratio, property value, borrower experience, and potential for business success.

Why should your business consider a commercial loan?

Businesses seeking to grow and expand should consider commercial loans, so long as growth can ultimately cover loan payments, interest and fees. Commercial loans can support efforts to renovate or upgrade facilities, buy new properties or equipment, hire more staff, launch an advertising campaign or cover administrative costs.

Questions about this article? Reach out to our team below.