Commercial Loans Explained
When it comes commercial loans, they have been designed for many different purposes, like buying equipment, expanding, or even starting your business up. The commercial form of lending is viewed as a small business loan that is meant for medium and larger businesses. Here we will discuss more about their use and how to choose the right one for you.
As stated above, commercial loans are made for a variety of purposes when it comes to businesses. They can be used to finance a business purchase or expansion, fund new equipment or inventory, or cover short-term cash flow needs. This type of loan is based on the principle of lending that is based on debt. The agreement is made between the lender and the business.
What Exactly Are Commercial Loans?
As we already mentioned, they are a form of small business loans, that businesses can use to buy equipment, expand their business, or cover short-term cash flows. Like any other loan, you can get them through traditional lending institutions, like banks or credit unions, and as well from alternative or online lenders.
It’s important to note that many lenders, not all, offer commercial financing to medium or larger businesses. That’s why it’s of big value to research different lenders since one might view you as a small business while the other one can view you as medium size.
How Do Commercial Loans Work?
Commercial loans, like many others, have set terms and fixed repayment plans that are based on your credit score. With that said, terms and rates vary from lender to lender.
This means that some lenders will ask you to put the collateral while others won’t. As well, you might find a lender that will ask you to put a down payment, and on the other side, you might find one that is not going to ask either for a down payment or collateral.
Because of that, it’s important to do the needed research and familiarize yourself with the different options available to you.
Types of Commercial Loans
A lot of business loans have many different types to them, and commercial loans fall in that category as well. They have a whole specter to choose from, and we will give you some of them.
- Short term loans. Designed to borrow a smaller amount of money that you repay back within 18 months or less. They are very useful for daily operating costs.
- Term loans. The standard form of loans with fixed monthly payments. They are usually repaid in a period of two to 25 years, and the interest is calculated based on your balance.
- Commercial real estate loans. Help the business with buying a new property like a new office, building, or even a warehouse. They offer the biggest amounts of money to borrow, and they have the longest terms of repayment.
- Equipment loans. As the name says, loans are used to buy equipment or assets for business needs. The asset you are looking to buy secures the loan.
- SBA commercial loans. They don’t directly issue you a loan, but in case you default on the loan, they cover one part of the loss.
Line of credit. Easy to get, and you can borrow up to 100,000$ and use it for any purpose.
Commercial Loans: Benefits and Downsides
Even though commercial loans are amazing simply because businesses can use them to cover their expenses or to even expand, with all of that amazing aspects, they do have benefits and drawbacks to them as well. Here we will list some of them.
Benefits of commercial loans:
- Lower interest rates
- Longer repayment term
- Possibility to get larger amounts to borrow
- Fast to get
Downsides of commercial loans:
- Requires good credit score
- Collateral required
- Possible fees
- A lot of paperwork involved
In comparison to other business loans, commercial loans offer funding with much lower interest rates. That means that your business can get the needed money, but you are still going to keep the costs low, and that way, you are able to repay the loan back faster. Another great benefit they provide is that you can get much larger funding if your business needs that.
Because they most often require collateral, in case if you halt the loan, you are going to lose it. It can be a property, equipment, or any other asset, which can put you in more financial hardship that can end up in debt. On top of that, applying for these loans takes a lot of paperwork to be done and as well, requires a good credit score.
How to Qualify for a Commercial Loan
If you are considering getting a commercial loan, there are some criteriums you will have to meet first. We will give you a rundown of what you will need.
- Get pre-qualified. It might be a hassle, but it’s always good to do this since you will know exactly how much money you can borrow and what type will suit your business the best.
- Know your credit score. In order to get a better deal, your credit score needs to be good as well. Lenders will often accept scores of 660 to 680, but the better your score is, the better terms you are going to get.
- Prepare needed documentation. You will need to prepare documents that include your business plan, financial reports, tax returns, collateral details, and as well bank statements, not older than three months.
- Boost your chances. There are always things you can do to secure the loan. Try to get a co-signer. Always provide collateral since it will make a loan less risky for lenders and offer a larger down payment.
Following these steps and as well consulting can help you get the desired loan much easier.
Where Can Commercial Loans Be Beneficial?
As we already mentioned throughout this article, commercial loans are designed for mid-size businesses that are looking either to expand, buy needed equipment, or just cover short-term cash flow. This type of loan can be very beneficial if you prove that this loan can help you boost your business and you manage to show that your revenue is going up in the future.
As well it can work wonders for businesses who are looking to expand more and hire more people, hence making more later down the road. On top of that, it can be a great thing for businesses who want to remodel their inventory to get newer ones to help them make their business even better.
If you have a business and you are looking to make it even bigger, or you just want to refresh your old inventory and equipment, this is the right loan for you. Even if you didn’t know much about commercial loans before, in this article, you can find useful information that can ease your decision-making.
Once you read this, you will have more insight, and with some consultation with an expert and as well some research, you can be one step closer to getting the best deal for yourself and your business.