How Do Commercial Loans Work?

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When you’re just starting out, a personal loan, credit card, or small business loan might be just enough to get you going. But as your business grows, you’re going to need more working capital to fund operations, hire staff, open new locations, purchase inventory, and more.  That’s where commercial loans come in. Commercial loans are critical for helping your business expand and take things to the next level. They also provide ample resources to weather out cash crunches and stay ahead of the competition.  There are many different types of commercial loans and numerous factors that go into your ability to qualify for one. Take a look at how commercial loans work. 

What Is a Commercial Loan?

A commercial loan is any type of loan made to a business instead of an individual. Commercial loans provide an influx of capital businesses can use to propel growth and increase earnings.  Commercial loans are also known as small business loans. Although some lenders might distinguish between the two. In this case, small business loans will refer to lower funding amounts while commercial loans feature higher funding amounts made to medium-sized and larger businesses. Any business looking to obtain a commercial loan will have to get approval from a lender, such as a bank or another financial institution. The interest rates and repayment terms you receive will depend on your business’s qualifications.  Most commercial loans are term loans that feature fixed monthly payments over a set timeframe. Many businesses are able to choose their repayment term, which can range from one year to 25 years – or even longer in certain cases. Commercial loans can include equipment financing loans, commercial real estate loans, and business lines of credit. There are also other commercial financing products like invoice factoring, equipment financing, merchant cash advances, and ACH financing. Some of these products may have smaller funding amounts and shorter repayment periods than a traditional term loan.  In some cases, commercial loans are secured by collateral. Collateral gives lenders an extra layer of confidence since they maintain the right to seize your assets should you be unable to repay your loan. Common types of collateral include invoices, accounts receivable, equipment, real estate, and more.  Most small businesses can secure commercial loans through online lenders, banks, and credit unions. The interest rates, fees, funding amounts, and terms your business qualifies for will depend on the type of loan, your creditworthiness, your financials, and your goals. 

How to Get a Commercial Loan

Different types of lenders will have different requirements for obtaining a commercial loan. That said, there are some common similarities across most applications. Here are the most critical steps you should follow when it comes to getting a commercial loan. 

Do Your Research

You’ll have to know all the ins and outs of your business before sitting down with a lender. Determine your business’ needs and pinpoint exactly how financing can help you reach the next phases of growth.  It’s also important to understand what repayment terms your business can afford, the funding amount you need, and what sort of lending products fit best. 

Know Your Credit Score

Your personal credit score and your business credit score are two of the most important factors lenders will look at when reviewing your commercial loan application.  Ideally, your credit score should be at least 700 for the best chances of approval. Remember, the higher your credit score, the more negotiating power you’ll have when it comes to securing favorable terms and lower interest rates.  If your business is new, you may not have established creditworthiness yet. In this case, your personal score will have more weight. 

Prepare Documents

Commercial loan applications will require you to prepare several documents. This includes profit and loss statements, balance sheets, bank statements, tax returns, business licenses, and cash flow statements. Most lenders will also want to see at least 2 years of business history. 

Devise Business Plans

Some lenders, especially banks, will want to see a business plan. A business plan details your goals and how you plan to achieve them. It should include information about your company, industry, objectives, strategies, and financial projections. Use this guide as a starting point for developing your business plan. 

How Do You Qualify for a Commercial Loan?

Whether or not you qualify for a commercial loan ultimately comes down to your ability to repay the loan. Lenders will concentrate on several factors to determine your eligibility.  A high credit score is critical, and it’s also important to demonstrate solid cash flow. A business plan can help outline your goals and strategy for success. Make sure to explain why you need the funds, how much funds you’ll need, and how you plan to adapt should the worst-case scenario happen.  Lenders want to see that you are organized, meticulous, and have all documents, statements, and information readily available. Make sure to look over your commercial loan application and business plan several times before sending it in. Any mistakes, errors, or misrepresentations can delay the process or even hurt your ability to secure financing.  Finally, stay away from factors that can hurt your ability to secure a commercial loan. This includes applying for too many loans all at once or leaving out critical documents. 

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What Is the Minimum Down Payment for a Commercial Loan?

The type of lender and your financial history will play a role in whether or not you’re required to put up collateral or make a minimum down payment for a commercial loan. Most lenders want to know you’re motivated and incentivized to repay your loan. In other words, they’re looking to ensure you have some skin in the game. As a result, they may require some form of collateral or a down payment.  The minimum down payment for commercial loans usually ranges between 0 – 20%. If you’re purchasing real estate, vehicles, or equipment – the products themselves will usually serve as collateral. Otherwise, you may have to put up other business assets or even your own personal assets.  Not all lenders will enforce these requirements. National maintains a database of over 75 different lenders, many of which offer commercial financing without collateral or down payments.  You can secure funding fast – in hours, not weeks – without the hassle of creating a business plan or adapting to strict requirements. Plus, we have financing solutions available for all different kinds of credit scores.  Get in touch with a Business Financing Advisor and learn about solutions that can boost your business!

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Last Updated on June 3, 2021

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About the Author, Akash Pagare


Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital and the author. Do no 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 in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.