What Are Commercial Loans And Financing?

Commercial Loan Definition

So what is commercial financing? It’s when a business borrows money from a financial institution. Here’s how commercial loans work. The business receives a lump sum to be used at the owner’s discretion. The funds are then repaid over time according to the conditions of the loan agreement. The lender charges interest that is added to the loan balance and included in the payments. Depending on the type of commercial loan, payments could be made daily, weekly, or monthly. 

In order to qualify for a commercial loan, businesses apply using their credit scores (often including the owner’s personal credit score), revenue, and time in business. Different lenders may have different requirements and request additional types of documentation. They may also request that you offer some type of asset as collateral for the loan. 

4 Types of Commercial Loans

These are four of the most common types of commercial loans to consider as a starting point for your business financing needs.

SBA Loans

Government-backed SBA loans help connect businesses with financing opportunities for a number of different purposes. These types of loans are notorious for their lengthy application review periods, which can stretch out several months. Loan amounts go as high as $5 million, with competitive interest rates and repayment terms that can last anywhere between 10 and 30 years. Most SBA loan programs also require a 20% down payment on the loan so that you’re heavily invested in the success of the business. 

There are several different types of SBA loans to consider. A 7(a) loan is the most common one and the funds can be used for general purposes. Smaller 7(a) loans (under $25,000) don’t require any collateral. SBA 504 loans are used to purchase a specific asset, like a building or machinery. 

Term Loan

Term loans can either be short-term (lasting less than two years) or long-term (lasting as long as 25 years). In most cases, these loans come with a fixed interest rate and consistent monthly payments so you know exactly what you’ll pay back each month. If you use an online lender, you can often get approved and funded in just a couple of business days, making these an attractive option for businesses needing fast cash. A term loan can also help you better predict cash flow since the payments are consistent each month. 

The application process varies depending on the lender. A traditional financial institution, like a bank, may have a longer review process compared to an online lender. Also find out how long it takes to receive funds after your application is approved.

Commercial Real Estate Loan

Also called a commercial mortgage, a commercial real estate loan is designed to help your business purchase property. This could be an office building, retail store, warehouse, manufacturing facility, restaurant space, or other type of real estate. Loan amounts are typically large and the term length is extended to make payments more affordable. 

In addition to purchasing a property for your business, you can also use a commercial real estate loan to refinance the terms of an existing commercial mortgage or renovate a property you already own. If you dream of owning or expanding space for your company, a commercial real estate loan can help you do that. 

Business Line of Credit

Rather than giving your business a one-time injection of capital, a business line of credit gives you access to credit when you need it over a period of one to two years. It acts like a credit card in that you can draw on your credit line as needed and pay interest on your balance, rather than the entire available amount. 

A business line of credit can be an ideal type of commercial financing in a number of scenarios. For starters, a line of credit can be used for financial emergencies, like broken equipment that needs to be replaced. It can also help cover ongoing expenses, like payroll, especially if your revenue is inconsistent throughout the year. Finally, a line of credit gives you agility to act on opportunities as they arise, without having to apply and wait for financing in the future.

Pros of Using a Commercial Loan

Business loans can be a great way to manage and grow your company. Here are some of the primary benefits of using a commercial loan.

Access to capital: When your business’ current cash flow is not enough to get through slow periods or ramp up for busy seasons, getting a commercial loan gives them access to the capital to do so. And because there are so many different types of business loans out there, you can find one that’s structured for your business needs. 

Faster growth: Taking on debt doesn’t automatically mean your business is in trouble. In fact, many businesses often use debt to accelerate growth and take advantage of new opportunities to expand.

Retain full ownership: There are many ways to raise funds for your company, including taking on external investors. But with a commercial loan, you get to retain full ownership of your company.

Cons of Using a Commercial Loan

There are downsides to consider as well before you decide to apply for a commercial loan. 

Application process: The application process can be intimidating, and there’s no guarantee you’ll get approved. Be prepared to put in a little elbow grease. But if your business financials are already in order, then you may not have much to worry about. 

Interest and Fees: There’s no such thing as free money, and you’ll have to pay interest and fees on your borrowed funds. Weigh the benefits you expect to receive and make sure you can afford the payment terms, even in a worst-case scenario. 
Cash flow crunch: Making loan payments can be tough on your cash flow. Consider all the obstacles your business may face and how well you could maintain those payments before making a decision on your business loan.