What is commercial financing, and what are some of the most important things that you need to know? Continue reading to learn more!

Business owners are constantly looking for new ways to take their business to the next level, but what if they don’t have the resources to seize the opportunity in front of them? For many entrepreneurs, it’s impossible to afford the necessary equipment or opportunities to grow their business, especially in the beginning stages of their venture.

Funding, or the lack of it, is a common problem for entrepreneurs that can prevent them from growing their business. Some choose to wait and see if they can generate enough revenue to afford the venture before the opportunity has passed, whereas others might decide to downsize other areas of their business to free up capital.

Both of these avenues are very risky, as you might lose out on the opportunity or hurt your business by downsizing, which is why commercial financing is so important to those who find themselves in this position.

Commercial financing is a fancy way of describing the multiple funding options available to your business. Whether through term loans, business lines of credit, or asset-based lending, commercial financing can help you secure the capital you need to hire new employees, expand to new office space, or purchase the necessary equipment to double your revenue.

Rather than risk the integrity of your operation, you can secure a commercial financing option to help support your business as it grows.

Before you search “what is commercial financing” in your browser, we’ve encompassed all the information you need to know. Read on to learn more about commercial financing and how it can help your business grow without restraints.

1. What is commercial financing?

So, what is commercial financing exactly?

Commercial financing is an overarching term to describe the financing options available to businesses through external lenders. You can use commercial financing for almost any business expenditure, but many business owners choose to use them for asset purchases, working capital, and large ventures, such as acquiring a competitor’s business.

You can choose between a variety of formats for your funding based on your needs, such as term loans, lines of credit, or equipment financing.

Securing commercial financing is as easy as finding a lender with terms that meet your needs. However, every lender is different, and each one might offer different rates, terms, and types of financing based on your business information.

One thing they’ll consider before approving your loan is your credit score, as the lender will need affirmation that you’re able to pay back the loan within the terms. They’ll also consider your business’s profitability, and the age of your organization, amongst other factors, before offering you commercial financing.

If you’re finding it difficult to find a lender for your business, you might want to consider working with a marketplace like National Business Capital.

As you know, business owners don’t have an abundance of time to search through many different lenders and compare their terms, but a marketplace connects you with multiple lenders at once, saving you time and resources.

2. What are the different types of commercial financing?

Commercial financing is broken down into a few different types, such as:

2.1. Term loans

A term loan is a commercial financing option that’s given in a one-time lump sum payment. You must repay the borrowed amount within the terms outlined by the lender, and you’ll likely have to pay an interest rate on top of the amount.

Some lenders will offer fixed interest rates, while others might propose variable interest rates, which decrease based on the amount of the loan you’ve paid off.

Term loans often carry little to no restrictions on how the money can be spent, making it a great option for business owners looking to cover a variety of expenses with one commercial loan.

2.2. Business line of credit

A business line of credit is revolving credit that business owners can draw on whenever they need capital. Once you pay the borrowed amount, you can draw that funding again, allowing you to have a continuous stream of capital for any situation.

However, this financing option is notoriously difficult to obtain if you’re a newer business or one with poor credit. If you’re in this situation, you should make sure to speak with as many lenders as possible to secure financing in this format, as you’ll never know which one will offer you terms that meet your needs.

While a business line of credit might sound similar to a business credit card, the two are actually very different. Unlike a line of credit, business credit cards are limited to transactional purchases, and you can’t draw physical cash without paying a hefty fee.

Business lines of credit, on the other hand, are made to draw physical cash at a moment’s notice, making them beneficial for any entrepreneur who regularly needs physical capital.

Types of commercial financing: business line of credit

2.3. Commercial Real Estate Loans

Commercial real estate loans work the same as term loans, but they’re restricted to real estate ventures only. Entrepreneurs secure this type of financing when they’re looking to acquire a new office or if they’ve found a property they’d like to invest in.

Additionally, commercial real estate loans are further broken down into the following categories:

  • Permanent Loans: Real estate loans with built-in first mortgage payments.
  • Blanket Loans: Financing options designed to help with the purchase of multiple properties at once.

2.4. Commercial Construction Loans

This type of commercial financing is designed to help construction companies cover the expenses associated with the physical construction of a structure, including the design and planning stages of the venture.

A commercial construction loan is definitely something to consider if you’re seeking to construct a new building, as it can help you turn your idea into a reality.

2.5. Equipment financing

Some industries need specialized and specific equipment to conduct their business operations, like construction companies needing large vehicles to transport materials. In some cases, business owners can’t afford the price tag of the equipment they need, forcing them to settle on using lesser-quality equipment or preventing them from working entirely.

Equipment financing allows you to get around this hurdle, as you can transform a sizeable purchase into more manageable monthly payments. But, before you make a final decision, be sure to speak with your lender about the contingencies of your financing.

Some lenders may only offer equipment lending programs, which forces you to return the equipment at the end of the terms instead of keeping it.

2.6. SBA Loans

One of the main issues business owners face with financing is convincing the lender that you’re capable of paying back the loan within the terms. SBA loans are a way around this issue, as the government guarantees to pay back a portion of the loan if you default.

However, the government backing also makes this option much more difficult to apply for, and relatively new businesses or those with poor credit might find it challenging to reach approval.

Most SBA loans have borrowing limits of up to $5 million and repayment terms of generally 10 to 25 years, except for microloans, which carry a maximum borrowing amount of $50,000.

2.7. Inventory financing

Some businesses need to purchase their inventory in bulk to prepare for an upcoming period of increased sales. Manufacturers commonly experience this as they prepare for the hustle and bustle of the holiday season.

Instead of crossing their fingers and hoping they’ll have enough inventory to meet the demand, they’ll find a lender who’s offering inventory financing, so they can afford to purchase additional units of inventory.

Lenders will often require you to offer the inventory you plan to purchase as collateral for the loan, so make sure to account for that before you make any final decision.

3. Will I need to offer collateral for commercial financing?

Yes, you may need to offer collateral for commercial financing. You can find it in two forms: secured and unsecured. Secured loans require you to offer some form of collateral to the lender, such as real estate, equipment, or other tangible assets. On the other hand, unsecured loans don’t require tangible collateral but are technically secured by your accounts receivable.

This means that a lender will evaluate your cash flow and determine whether or not you’re capable of paying back the financing within the outlined terms based on your current business standing instead of requiring a physical asset.

Many entrepreneurs prefer unsecured financing, and for a good reason. If you make late payments and default on the financing, the lender can seize the collateralized asset as a method of recouping the lost funds, potentially leaving you without something you need to conduct business.

Although unsecured financing is more popular, it’s also more difficult to obtain, as you’ll need to prove to the lender that you’re capable of paying back the amount borrowed within the terms.

Your lender will likely evaluate your credit history, time in business, and the amount you’re seeking to borrow before offering you terms, but don’t accept what the first lender offers as the only option you have. 

By comparing lenders or going through a marketplace, you can find a commercial financing option that fits your needs.

4. How can I apply for commercial financing?

To apply for commercial financing, make sure to start by assessing your borrowing needs – how much money are you going to need and for what period of time. Then, evaluate your credit score; this will help you determine which funding options you are eligible for. With this information in hand, you can start comparing lender programs. The last step is to prepare the documentation for your preferred lender, and submit it for their review.

4.1. Assess your borrowing needs

Once you’ve determined that you’re going to secure a commercial loan, your first step is to establish the dollar amount your business will need to grow. You should ensure you’re being realistic about this number, as you don’t want to borrow too much or too little.

Securing commercial financing that’s less than what you need can leave you scrambling to make up the difference, whereas borrowing too much can overextend the capabilities of your business and potentially leave you financially restricted.

Rather than guessing about your needs and risking more stress, you should carefully determine your loan amount before starting the process.

4.2. Evaluate your credit score

Next, you’ll want to take a look at your credit score, as it will play a critical role in determining which funding options you’re eligible for.

Although the most favorable rates and terms are commonly offered to those with high credit scores, there are many lenders that will help you secure the capital you need despite your poor credit history; It just takes some time to find them.

You might want to consider proactively strengthening your credit score prior to the process to secure better rates. That is, of course, if you have the time. Some entrepreneurs might need financing fast, and that limits what you can do with your credit score.

4.3. Research and compare lender programs

Now that you have a good understanding of your business information and needs, you can begin to search for lenders. This process can be lengthy, as you’ll need to set aside the time to compare and contrast each lender’s rates and terms.

You might find a lender that offers exactly what you’re looking for, but they might only offer their financing to businesses that have operated longer and earn more revenue. While discouraging, it’s not the end of the road, as there are hundreds of lenders out there that can fit the needs of your organization.

Additionally, you might want to consider teaming up with a lender marketplace in your search. These organizations encompass multiple lenders under one platform, which can save you time and resources during your search.

However, you want to make sure that any organization you team up with offers transparent guidelines regarding all of their programs, as you don’t want to run into a situation where you have to pay hefty fees you were unaware of.

Fortunately, National Business Capital’s 75+ lender marketplace is as transparent as possible, and our team does the heavy lifting for you, too.

4.4. Prepare documentation and submit your application

Finally, you’ll prepare all your relevant documentation, including your business bank statements, tax returns, and business plan, to ensure you’re ready for the process. Some lenders might not need some of these documents to approve you for funding, but it’s always better to be overprepared.

5. Commercial financing with National: All your options in one place

Commercial financing is a solution to many business challenges, but only if you can find a lender that offers terms that meet the needs of your circumstances.

You shouldn’t secure a loan with an interest rate you can’t afford, repayment terms you can’t meet, or has a collateral requirement that you can’t risk; You can find a lender that will allow your business to grow without restraints.

Many entrepreneurs will spend long periods of time researching and comparing lenders before coming to a decision, but you can streamline this process by teaming up with a lender marketplace, like National Business Capital.

At National, we understand entrepreneurs because an entrepreneur built us. We prioritize our client’s experience with a digitalized application process, dedicated Business Finance Advisors, and a reliance on the latest tech to serve the needs of business owners more efficiently nationwide.

With over 2,000 reviews across TrustPilot and Google, over $1 billion funded for our clients since 2007, and a commitment to being better than we were yesterday, National is uniquely positioned to help you grow your business and surpass your competition.

Ready to get started? Apply now to start our 60-second application process and take the first steps on your financing journey.