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Top 5 Types of Commercial Loans for Your Business

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8 min read. August, 2022 – Amanda D'auria

What are the best types of commercial loans that you can take for your business? Continue reading to learn more!

You can’t anticipate the next growth opportunity that comes your way. Sometimes, it may arise at a favorable time, allowing you to capitalize on the moment and take your business to the next level.

But, in other cases, you won’t have the necessary resources to afford the opportunity, and you might have to let it pass by as you wait for the next one to come along.

Finding yourself in a situation like this is frustrating, but with commercial financing, you can proactively set yourself up for success and always be prepared for the next opportunity.

The saying, “Money can’t buy happiness,” doesn’t exist in the business world, and many entrepreneurs will routinely use commercial financing to support their operations through the many challenges they face.

Between business lines of credit, term loans, and more specific options, like real estate commercial loans, you’ll have a lot to consider before making a final decision, especially if you’ve never dealt with financing in the past. But, don’t worry; We’ve made it easy for you. 

Here’s everything you need to know about commercial financing and 5 types of commercial loans for your business to choose from:

types of commercial loans

What Is Commercial Financing?

Commercial financing is an overarching term to describe the financing options available to businesses. You can seek commercial financing for a variety of issues, such as hiring new workers, a new building acquisition, or purchasing expensive equipment, making it a highly beneficial option for entrepreneurs in all industries.

Some people believe that financing is only used when a business is in the red, but that couldn’t be further from the truth. Many business owners use financing to take advantage of growth opportunities they wouldn’t be able to afford otherwise, allowing them to maximize their growth and outpace their competition without restraint.

5 Types of Commercial Loans for Your Business

When it comes to the different types of commercial loans that you can take, it's important to keep in mind that each commercial financing option is different, and one might offer more benefits for your organization than it will for another.

Before you spend hours researching the topic, here are five types of commercial loans for your business:

1. Term loans

Term loans are what most people think of when they hear “commercial financing.” Term loans are one-time lump sum payments that you must repay in full within the terms outlined by your lender.

This option carries the lowest interest rates compared to other financing options, which allows a broader scope of business owners to qualify and grow their operations.

You can use a term loan for a variety of purposes, but you’ll likely have to tell your lender how you plan to use the funds before they approve you for financing.

For example, you can use a term loan to purchase a new building for your company, hire new employees to complete a project, or use it for working capital purposes, as long as you pay back the funding within the terms. 

Prons Cons
Lowest interest rates compared to other options, ability to access large amounts of capital, no equity transaction Less flexibility in the use of funds, might need to offer collateral, a lengthy application process with traditional lenders

2. SBA loans

SBA loans are financing options that the government almost entirely secures. Although it might sound confusing at first, it’s essentially a term loan where the government guarantees to cover 75% to 85% of the total amount.

The government backing adds an extra layer of security for lenders because they know that, even if you default on the loan, they’ll receive most of the capital they lent you.

However, the extra security makes qualifying more complex, and entrepreneurs who use their profits for business growth might find it difficult to convince a lender they qualify. 

When speaking about types of commercial loans, there are a few types of SBA loans you can use for your business, such as:

    • SBA 7(a) Loans: This type of financing is the most popular of the bunch, and for a good reason. You can borrow up to $5 million with an SBA 7(a) loan, with repayment terms ranging from 5 to 25 years. Business owners use this financing option for various purposes, such as real estate acquisition, equipment purchases, and working capital management, because of the program’s high borrowing limits and flexibility.
    • SBA 504 Loans: SBA 504 loans are less flexible than 7(a) loans, but they still carry the same high borrowing limits that characterize 7(a) loans. However, you can only use this type of commercial loans for major fixed-asset purchases, such as the acquisition of a new office building, making it ideal for those looking to grow their business on an expanded scale.
    • Microloans: As the name suggests, microloans are smaller-scale financing options. They carry a borrowing limit of $50,000, maximum repayment terms of 6 years, and interest rates generally fall between 8% to 13%, making them a great option for new entrepreneurs. You can use a microloan for various purposes, such as working capital management, inventory purchases, small-scale expansions, and more, as long as you’re able to repay the borrowed amount within the terms.

 

Prons Cons
Flexible options for any entrepreneur, high borrowing amounts, guaranteed government security Might require down payment, difficult underwriting process, lengthy approval times

3. Commercial real estate loans

A commercial real estate loan is used to fund the purchase of a commercial real estate property for business use or investment purposes. Repayment terms are generally between 6 months and 15 years.

There are a few different types of formats you can choose from, like amortized loans or ones that end in a balloon payment. There are a few other subtypes as well, including permanent loans, which act as an initial mortgage payment on the property, and blanket loans, a financing option to support the purchase of multiple properties at once.

Additionally, making timely and consistent payments on your loan can positively impact your business credit score, allowing you to grow your business and credit simultaneously.

Prons Cons
Multiple options for different needs, can help you build credit, transform a large expenditure into manageable payments Difficult to qualify for, economic pressure can make repayment difficult, lack of flexibility

Among the types of commercial loans that you can take for your business are commercial construction loans.

4. Commercial construction loans

Commercial construction loans are used by contractors to fund the design and construction of a building. Much like real estate loans, this option has high borrowing limits and flexible repayment terms, allowing you to tailor your financing to your circumstances.

However, as opposed to other types of commercial loans, construction loans aren’t approved easily, and you might have to display a high credit score, lengthy time in business, and a solid business plan before a lender can finance your venture.

Additionally, your lender might require you to pay the balance in full at the end of your term, so you’ll only have to pay interest payments as you design and build the structure.

Prons Cons
Flexible terms, high borrowing limits, opportunity to build a relationship with your lender Might have to pay the loan in full at the end of term, might require a down payment, costs more than funding the construction yourself

5. Commercial auto loans

Lastly, we have commercial auto loans, which are among the best types of commercial loans for a business that needs vehicles to conduct its operations. In most cases, the vehicles they need are expensive, and they might not be able to afford a sizeable purchase as they try to manage their working capital.

An auto loan is a solution to this issue, especially in a world with supply chain issues and rising auto part costs.

If you find a deal on one or more vehicles you need, it’s probably best to secure that deal as fast as possible before it’s too late, and a commercial auto loan can help you do just that.

Prons Cons
Ability to purchase vehicles quickly, flexible terms, purchased vehicles can serve as collateral Repayment terms can outlast the lifetime of the vehicles, difficult to qualify with poor credit, will cost more than purchasing the vehicles outright

Other Financing Options for Your Business

Now that we covered the different types of commercial loans, let's take a look at a few additional options as well. Commercial loans are great avenues for business growth, but there are other financing options that you can seek to support your operation, such as:

1. Business line of credit

Similar to a traditional credit card, a business line of credit is revolving credit that you can draw on whenever you need capital. When you pay off the balance on your line, you can pull the same funds again, making it a popular financing option for business owners who need increased flexibility.

However, the flexibility of this option also makes it difficult to obtain, as lenders assume an increased level of risk when offering an open line of credit. You might have to offer collateral because of this, which can be a risky move if you can’t afford to lose the collateralized asset.

A business line of credit isn’t the same as a business credit card. You can use a business line of credit to draw physical cash, which you can’t do with a business credit card without incurring a hefty fee.

Business credit cards are designed for transactional purchases, like buying office equipment from a supplier, rather than funding your business with physical cash

Prons Cons
Flexible use of funds, opportunity to build a relationship with your lender, improves your businesses ability to adapt to changes Difficult to qualify, might need to offer collateral, low borrowing limits compared to other options

2. Equipment Financing

Many industries, like construction and agriculture, use specific and expensive equipment to perform their tasks and generate revenue. Newer businesses often don’t have the capital to purchase this equipment, so they’ll seek lenders offering equipment financing to give them a competitive edge in their industry.

Equipment financing is often collateralized by the asset you intend to purchase. If you end up defaulting on the payments, the lender will seize the asset you purchased with the financing, letting you avoid offering another, more critical asset as collateral.

Prons Cons
Ability to break down sizeable purchases into manageable monthly payments, don’t need to offer additional collateral, fast funding times, consistent, timely payments can improve your credit score Restricted for equipment purchase only, more expensive than purchasing equipment outright, potential to damage your credit if you default

3. Inventory Financing

Some businesses need to increase their inventory purchases before a period of high business activity to meet the demand. For example, a clothing company might choose to increase its inventory before the hustle and bustle of the holiday season to ensure they have enough product to fill its purchase orders.

If they can’t afford the additional expense, they might lose clients and fail to fill orders, which is why many entrepreneurs in the industry seek inventory financing. Much like equipment financing, lenders will supply the capital you need to purchase your inventory, turning an expensive purchase into manageable payments.

The inventory you purchase will serve as collateral, too, so you won’t have to offer another asset as collateral to secure the financing.

However, the interest rate you pay for the financing will make the purchase more expensive than if you had bought the inventory outright, so be sure to factor the increased cost into your decision.

Prons Cons
Ability to meet demand despite low working capital, highly beneficial for seasonal/cyclical businesses, less restrictive eligibility requirements More expensive than purchasing inventory on your own, high-interest rates, limited flexibility in terms of use

How to Secure a Commercial Loan for Your Business

Now that you have a solid understanding of the types of commercial loans available to your business, it’s time to prepare for the process of securing your funding:

Understand Your Borrowing Needs

Before you begin searching for lenders and comparing their programs, you should take some time to determine exactly how much capital you need to overcome your challenge.

You should review the financials of your business and the cost of your growth opportunity, but remember: be realistic.

Borrowing too much money can leave you struggling to pay it back, whereas borrowing too little can limit your ability to grow your business and might require you to take out another loan. 

Evaluate Your Credit

Your credit history plays a major role in the rates and terms offered by lenders. While it’s easier to secure a commercial loan with solid credit, those with lower credit scores can still find a lender for their situation; they just might have to pay higher interest rates and offer collateral.

Some business owners try to proactively strengthen their credit before starting the process, which can be beneficial. However, many entrepreneurs need funding fast, which limits their ability to improve their credit scores.

Research and Compare Lenders 

Next, before choosing among the different types of commercial loans, it’s time to research lenders and compare their programs. As you search, you should document the different rates, terms, and forms of financing offered by each lender to use later in the process.

You should also make a note of any fees each lender requires, as there might be a few that try to sneak unfavorable terms into your contract. You should choose a lender with a transparent process for the best results in your financing journey.

Gather and Prepare Your Business Documents

Once you’ve found a few lenders that fit your needs, you can begin to prepare your documents for the rest of the process.

Each lender will likely ask for different documentation, but you should have your business bank statements, tax returns, and business plan readily available to ensure you’re ready to have an educated and prepared conversation with your lender.

Submit Your Loan Application:

Finally, once you’ve prepared all your documents and finalized your research, you can submit your formal loan application to the lender of your choice. However, many lenders still use paper applications, which can take some time to complete accurately.

Be sure to account for this time before you start this step or if you want to minimize the time you spend, work with an organization that offers a streamlined application process, like National Business Capital.

Grow Your Business With National Business Capital

Whether you’re a construction company looking to purchase new equipment or a restaurant that wants to launch a marketing campaign, there are multiple types of commercial loans that can help you finance your growth.

There’s a variety of options available to you, from commercial real estate loans to business lines of credit, to help you reach your goals. However, traditional lenders have long underwriting processes, and taking the time to research all the lender organizations can be a time-consuming task.

Rather than waste the time and resources you could have spent running your business, you can team up with a marketplace to do the heavy lifting for you.

At National, we’ve streamlined your search for capital. Between a digitalized application process and our dedicated Business Finance Advisors team, we can connect you with the funding you need in days—not weeks or months— like with traditional lenders.

We genuinely care about you and your business, and you can count on us to be there for you before, during, and after the deal is funded.

Ready to get started? Fill out our streamlined, digital application and kickstart your financing journey.

Last Updated on July 27, 2022

National Business Capital helps entrepreneurs secure quick and fair financing to save time and cultivate sustainable growth.

Our stress-free online platform is designed for simplicity and speed, helping business owners go from application to approval in a matter of hours. And while we remain a leader in the Fintech industry, our clients agree it’s our personalized service and award-winning team that sets us apart.

From SBA loans to lines of credit, to equipment financing, and more, business owners can access all the different financing programs available to them in one place. Through our streamlined process, we have helped clients secure over $2 billion in financing since 2007, and, more importantly, we’ve helped entrepreneurs save a tremendous amount of time and grow faster.

About the Author, Amanda D'Auria

Amanda is the Marketing Coordinator for National Business Capital. She’s a graduate of Ziklin School of Business at CUNY Baruch College and holds a B.A. in Advertising, Marketing, and Communications. Amanda has extensive experience creating content, directing outreach campaigns, and managing operations. She is passionate about small business and helping entrepreneurs reach new heights.

https://www.linkedin.com/in/amanda-dauria/


Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.