Everything You Need to Know Before Applying for a Commercial Loan

Every business goes through tough financial times. This can happen due to hefty operating costs, accelerated expansion and its many associated costs, or perhaps, a tough business environment like we have recently experienced with the Covid pandemic.

As such, your business may require a boost to keep going. An option that you may opt to use is a commercial loan.

The beauty of commercial loans is that businesses can acquire them for any purpose. From acquiring assets to daily operating costs to purchasing supplies and payroll.

That said, here is everything you need to know before applying for a commercial loan.

What is a commercial business loan?

A commercial loan is debt-based funding extended to a business by a financer like banks, to cover financial gaps in capital expenditures or operational costs.

Types of commercial business loans

1.Business credit cards

Many businesses apply for credit cards to cater for their operating costs and purchase urgent items. Just like the typical consumer credit cards, the interest rates vary with the business creditworthiness.

However, as a small business owner, find a credit card with 0% introductory APR or one that has reward points based on usage amount.

2.Business credit lines

A business credit line works similarly to credit cards, but it’s revolving. Business credit lines work best when a business needs lump-sum cash, and they want the freedom to choose when to have it and its usage.

Additionally, with a business credit line, you can avoid interest payments on the amount you don’t use.

3.Hard money loan

These types of commercial loans have a short life term from a few months to around two years. They are mainly offered by private investors and charge high interest rates.

However, they work perfectly for businesses that need quick financing and are ready to repay it quickly.

4.Construction loans

Construction loans are given to businesses that intend to build new, repair, or renovate an existing property.

5.Blanket loans

Blanket loans work best for those businesses with multiple properties. It’s usually a single loan the business or several individual properties collateralize. The beauty of blanket loans is that they provided you with flexibility in managing your property portfolio and avoiding multiple mortgages.

The downside of a blanket loan is that it carries hefty and substantial payment penalties in case of default.

6.SBA loans

SBA loans offer better terms than other commercial loans and are partly guaranteed  by the federal government.

They are offered by SBA-regulated/guaranteed lenders. As such, businesses enjoy numerous incentives like longer terms and lower interest rates.

7.Real estate loans

Real estate loans provide the lender with much-needed financing for purchasing or building a new business property. They are long-term loans ranging from five to 25 years, and the interest rate is higher.

Other charges like survey, appraisal, and loan origination documents apply.

How commercial business loans work

Most SMBs apply for commercial loans to push their businesses to the next stage of growth.

Once the business owner identifies the loans that suit their need, the company may approach the appropriate financial institution with the necessary documentation and collateral, if needed. Should your business default on the loan, the collateral becomes the property of the lender.

For a financial institution to give a loan, they may look at a various number of factors that include:

Company finances

The issuing company looks at the company’s debt services and credit profile. This helps the lenders to determine the company’s creditworthiness and its ability to repay the loan.

Additionally, the financial institution examines the company’s balance sheet to understand their liabilities and cash flow.

Borrower’s information

Sometimes, the business owner may have a better credit history than the business, especially if the business is fairly new. In this case, the lender may request the business owner to provide their personal information to assess their creditworthiness and ability to repay the loan.

Business collateral

Primarily for construction or real estate loans, the lender may want more information on the applicable property to determine appraisal value.

Where to apply for a commercial loan

Well, the financial market is vast, and we have various places lenders can get commercial loans. These include;

Crowdlending

This occurs on marketplaces where the lenders and borrowers are matched according to their needs. With Crowdlending, the regulation is minor; as such, borrowers should engage at their own risk.

Commercial lenders

Commercial lenders are not banks, but rather financial companies that issue loans. As a result, lenders can expect to enjoy faster approval and lower costs than commercial banks, but the term is shorter and interest rates higher.

Banks

Banks act as the primary commercial lenders, and they provide financing with long-term options and good interest rates. This means a reasonable repayment amount, but the application process is more selective and takes longer.

Hard-money lenders

The hard-money lenders offer short-term repayment periods, and they require little documentation and time for approval. However, they charge higher interest rates.

Pros of commercial loans

Easy access to business capital

A commercial loan offers you the additional financing to meet your business needs. This can help you to expand, purchase new properties, or easily meet operational expenses.

Easier application process

Apart from the lengthier process in commercial banks, other lenders have an easy application process. This is faster than raising business money from debts or equity markets.

Manageable payments

You can quickly negotiate your repayment period with the loan provider, leaving you enough room to keep your business going.

Cons of commercial loans

High Interest rates

Commercial loans have fixed or floating interest rates payable monthly, which may affect the business’s growth, especially when sales are slow.

Tedious application and paperwork process

A commercial loan, especially from a bank, may require significant paperwork. For example, you may need to submit the necessary documents for approval and appraisal for a property loan.

The inflexibility of funds usage

When making commercial loan applications, you need to specify the usage of the money and repayment method. For example, a loan meant for property development cannot be used for operations.

Bottom line

Commercial loans provide the business owner with a great way of accessing financing  to continue operating and expanding their business. This means achieving business goals and dreams at a faster rate.

There are many types of commercial loans and a variety of lenders. Assess your business and identify the right type of loan and lender to suit your specific financial needs.