If you own or run a business, you’re likely to have heard the term “commercial loan.” These are types of loans that businesses can use for buying property, running their operations, or growing their services. This guide reveals what you need to know about commercial loans.
What is a Commercial Loan?
A commercial loan is money borrowed by a business, not individuals. It can be used for anything that has to do with the business including equipment and property purchase, worker payments and more. It can however not be put to personal use.
In most cases, these loans are given by banks or credit unions. But to secure the loan, the company needs to prove that it can repay within the agreed term. Proving this includes showing your company’s credit score, income, and how you plan to use the money.
As we said, banks and credit unions are the usual sources for these credits. However, a company can also secure private money loans for its business. These come from individuals or private companies instead of banks. According to John Pribble of DFW Hard Money, this source can serve as an alternative when traditional banks reject a credit application.
Common Types of Commercial Loans
There are different types of these loans. Each one is designed to meet a different business need. Let’s take a look at some of them.
1. Term Loans: You are credited with a certain amount of money, which you need to pay back with interest over time. This financial credit is perfect for when you need to make large purchases or buy equipment.
2. Business Lines of Credit: This gives you access to money up to a set limit. What that means is that you can only use it when you need it and pay interest on the amount you use.
3. Commercial Real Estate Loans: These help companies buy, build, or fix up a property. In many cases, the property in question is used as collateral.
4. Equipment Loans: With these, you can buy machines or vehicles. More often than not, the repayment term is often determined by the useful life of the equipment being purchased.
5. SBA Loans: These are government backed loans that give small businesses access to financial credit they would, otherwise, not have gotten. Usually, these credits have lower rates, but you have to deal with a lot more paperwork. You can read this article to learn how to get this credit.
What are the Terms Like?
The terms of a commercial loan can be very different from those of a personal credit. Rates are based on the amount you want to borrow, your credit score, and how healthy your business is. Some loans only last for one to five years, while others may stretch to 25 years, especially for property loans.
Bear in mind that many commercial real estate loans come with balloon payments. This means you’ll make smaller payments every month and one large payment at the end. Therefore, you’ll need to make plans for that ahead of time.
What Lenders Look For
Your business must show strong numbers to secure this loan. This includes:
- A good credit score (personal and business)
- A steady cash flow
- A smart business plan
- Collateral, such as property or equipment
Most lenders will want to know what you plan to do with the money and how you’ll repay them. Some lenders may also ask for personal guarantees. What that means is that you agree to pay back the loan yourself if your business can’t.
The Loan Process
Usually, this is how the process goes:
1. You Apply – You’ll share your business plan, how much money you need, and what you need the money for.
2. Review – The lender looks at your history, income, and credit.
3. Approval – If you’re approved, you’ll be given a list of terms to agree to.
4. Funding – The money is sent to your account as soon as you sign the papers.
There may be a lot of documents to submit and papers to sign. However, a trustworthy lender will guide you through the process. This is one reason why you need to carefully choose your lender. You can visit https://www.uschamber.com/ to learn about some of the documents you might need to submit.
Tips Before You Apply
Before you apply, keep these things in mind:
1. Know what you need: Know exactly how much money you need and why.
2. Get your numbers ready: The lenders will want to see your financials.
3. Compare lenders: Don’t just go with the offer of the first lender you see. Instead, compare the rates, fees, and terms of different lenders to find the best offer.
4. Read the small print: Find out if there is a balloon payment or early payoff fee.
You should also consider lenders in your area. This is because they are more likely to understand your area and needs. Moreover, since they are closer, you might even get faster responses and better service.
Conclusion
Getting a commercial loan is a big step for any business. It can help your company grow or give you the money you need to stay afloat. However, it’s important to choose the right loan, understand the terms, and be ready for the commitment.
