What is a Commercial Loan?

Learn about commercial loans for business owners and real estate investors. Includes the different types of commercial loans and frequently asked questions.

Updated on December 18th, 2019

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Commercial loans refer to debt-based financing that is used to fund large investments and operational expenses, such as equipment, working capital, advertising, and commercial real estate. A commercial loan is offered by banks, private money lenders, credit unions, and life companies.

There are several types of commercial loans available, varying from traditional and short term loans to equipment loans. Every type of commercial loan works differently, offering diverse repayment periods, loan rates, eligibility terms, and more.

How Commercial Loans Work
How Commercial Loans Work:

Commercial loans are typically used to help with short-term funding requirements for operational costs or for the purchase of equipment to assist the operating process. However, in some situations, the loan may also help a business meet essential operational needs including funding for payroll, marketing, new products, and stock used in the production process.

Also Read:

How to Get a Small Business Loan - Find out what you need to do to obtain a small business loan.

Best Lenders and Loans for 2019 - Learn about the best types of loans and the best lenders.

Equipment Financing - Learn more about equipment financing options.

Short Term Business Loans - Learn more about short term business loans.

Fast Business Loans - Learn more about fast business financing options.

Why We Chose Wells Fargo:

Wells Fargo provides a variety of small business financing solutions at attractive rates and is an approved SBA lender, making it a top choice for small businesses.

Flexible repayment terms and high limits are particularly beneficial features for small businesses requiring substantial funding and long terms.

With its robust selection of small business financing options, low rates, and convenient terms, Wells Fargo is a superior choice for small businesses that meet the qualification requirements.

Things to Consider When Evaluating Commercial Loan Providers:

  1. Traditional lenders, such as banks, offer lower interest rates and more flexible terms, but have strict qualification requirements, whereas non-traditional lenders have looser requirements, but offer higher interest rates.
  2. Evaluate what type of loan and repayment terms best suit your business needs. For example, if you need funds to cover a temporary deficiency, such as emergency repairs, a short-term loan is the best option.
  3. Know your creditworthiness. While specific qualification requirements vary by lender, your credit score will influence rates.

Best Commercial Loan Providers:

Our Rank

Loan Provider

Review

1.

Wells Fargo

Offers a variety of loans, low interest rates, and long repayment terms.

2.

Ondeck

Offers term loans and lines of credit at high rates but has looser qualification requirements than traditional lenders.

3.

BlueVine

Ideal for businesses needing fast loans and cash advances for small amounts.

4.

Lendio

Offers fast access to small business loans but has high fees and interest rates.

5.

Bank of America

Offers a wide variety of business loans, including SBA loans, with flexible payment terms, and is known for fast processing times.

6.

Kabbage

Automated lending platform that provides businesses with quick and easy access to small amounts of funding.

7.

LendingClub

A peer-to-peer lending service offering easy online application with fast funding process.

8.

JP Morgan Chase

Suitable for Chase customers seeking financing for startup or development costs at competitive rates but requires applications to be completed in-person.

9.

The Business Backer

Offers small business funding with good repayment terms and no early repayment fees.

10.

LendingHome

Hard money lender that provides real estate investors with fast access to 12-month loans.

11.

Fundation

Offers competitive fees and terms but has a long application process and strict qualification requirements.

9 Types of Commercial Loans:

1. Traditional term loan.

Traditional term loans are the most common form of commercial loans. With this type of commercial loan, lenders give money to business owners to establish and grow their business, then borrowers pay it back with interest over time. Term loans will generally offer loan amounts between $5,000 and $5 million, with 10 to 25 year repayment periods.

However, businesses can also obtain a versatile medium-term loan with 2 to 5 year repayment periods. Medium-term loans are ideal for short-term funding. For example, you may use this loan to fund an advertising campaign, payroll, or a new product.

2. Interest-only payment loans.

These loans are created for businesses expecting a large payout at a later date, rather than a steady monthly income. Also referred to as balloon loans, loan payments are made on the smaller interest amount, with a full “balloon” payment required at the end of the loan term, which can range between 3 and 7 years.

These loans are often used to build and construct a commercial property with the intention of refinancing the end-term lump sum once the project is complete.

3. SBA Loan.

The Small Business Administration (SBA) is a division of the U.S. government created to help small businesses with limited financial options and alternatives. There is a wide array of SBA loans available with lower interest rates than banks and lenders. It's important to note that the SBA does not provide loans, instead it helps business owners gain access to loans by working with banks.

4. Short-term loan.

Ideal for emergencies, one-time expenses, or unforeseen business opportunities, short-term loans generally offer loan amounts between $2,500 and $250,000, with 3 to 18 month loan repayment periods.

Applying for a short-term loan is fairly quick, with online applications taking just a couple minutes to complete, according to our research. Additionally, if you have a low credit score or just started your business, short-term lenders are more likely to work with you. However, it's important to note that short-term loans often come with high interest rates.

5. Hard money loan.

Hard money loans refer to loans offered exclusively by private investors. Similar to Bridge Loans, borrowers use this option to purchase real estate or to fund large expenses by offering their property as collateral. Instead of basing their decision on the borrowers' credit rating, hard money investors take the risk based on the value of the commercial property itself. This type of loan is common among the fix and flip community.

However, hard money loans have high interest rates ranging between 10% and 18% over a repayment period of 6 to 24 months. In addition, borrowers can be prepared for costly up-front fees.

6. Equipment loan.

This type of commercial loan is used when a business is unable to afford a valuable piece of equipment, such as electronics, vehicles, or machinery. Often used by business owners with physical storefronts and manufacturing departments, equipment financing is a cost-saving solution that is generally easier for business owners to obtain.

Loan amounts go up to 100% of the equipment's value, with a repayment period of between 6 months to 6 years. In addition, a great advantage of this option is that the equipment will serve as collateral.

7. Business line of credit.

A business line of credit works similar to a credit card. A lender gives a business owner access to a sum of money, which the borrower will pay interest on. With this option, if you ensure that your credit line isn't maxed out, you’ll always have instant access to revolving capital for equipment, investment opportunities, and unexpected emergencies.

Loan amounts often lie between $5,000 and $1 million, with repayment periods of 6 months to 5 years. This option is great for small business owners and seasonal businesses with changing needs.

8. Merchant cash advance.

Merchant services loan amounts range between $5,000 and $250,000, with repayment taken from monthly sales or credit card sales. The borrower is given a lump sum of money, which is paid back using a percentage of a business's sales or daily credit card sales.

If you are unable to make payment due to poor sales, the lender will take a small amount from the credit card sales. While merchant cash advances offer a fast and easy way to access funds, with great flexibility for small business owners, this is a very costly option long-term.

Check out our list of the 10 Best Merchant Services.

9. Commercial real estate loan.

Similar to a home mortgage, a commercial real estate loan assists with finances for upgrading or purchasing a commercial property. Loan amounts range between $200,000 and $20 million, with repayment periods of 20 to 25 years.

This option often requires a credit score of 700+, at least one year in business, and the owner's business should have at least 51% occupancy of the commercial property. With commercial real estate loans, the property will serve as collateral.

Learn how to lease commercial real estate.

How to Choose the Right Commercial Loan:

1. Determine your business loan needs.

Before you start the loan application process, you need to ensure that the commercial loan you choose is the right fit for your business. When researching commercial loans, make sure you consider your business's financial state, future goals, and your current stage of growth.

2. Maintain a good credit score.

Typically the best suited commercial loan will be the loan you qualify for. If you maintain a good credit score and a profitable business, your chances of qualifying for a loan are better. Don't waste time applying for a loan you know your business isn't eligible for.

3. Apply for the loan that suits your needs.

If your business has a specific need then only apply for the commercial loan that suits that need. For example, if you only require funding for equipment, then you should only apply for an equipment loan. In addition, if you're applying for a loan to pay off a small one-time expense, opt for a short-term loan instead of a long-term loan.

Securing a Commercial Loan:

Succeeding in securing a commercial loan will depend heavily on your credit rating and history. Moneylenders and financial institutions will want to ensure you're capable of paying their money back. The business owner applying for the loan will be expected to provide the necessary paperwork, which will help determine if their business is profitable.

Once your business is approved for a commercial loan, you will be required to pay the rate of interest at the time the loan is approved. Additionally, throughout the repayment period, you will need to provide monthly financial statements and take out insurance on large items bought with the loan funds.

Documents You Need to Apply for a Commercial Loan
Documents You Need to Apply for a Commercial Loan:
  • Bank statements.
  • Balance sheet.
  • Business debt schedule.
  • [Business plan}(https://www.thesmbguide.com/business-plan-template).
  • Loan purpose.
  • Personal and business tax returns.
  • Basic personal and business information.
  • How long you've been in business.
  • Profit and loss statement.

FAQs:

How does a commercial loan work?

A commercial loan assists with short-term funding for operational costs, equipment used in production and manufacturing, funding for payroll, and supplies used to keep the business operating.

What is the interest rate on commercial loans?

For the average borrower, this rate can range between 10% and 20%. However, the current commercial loan rate lies between 5% and 30%, according to our research.

How much do you have to put down on a commercial loan?

It depends on the type of commercial loan you choose. Amounts may differ from 10% to 30% of the loan amount, according to our research. For example, with SBA Loans you may have to put down 10% of the loan. However, with commercial real estate loans, you will be required to provide a down payment of 25% to 30% for a property worth $250,000 to $5 million.

How can I buy commercial property with no money?

You can apply for a commercial real estate loan. However, you will need to meet the loan requirements, which include a credit score of 700+, at least one year in service, and a 51% business occupancy of the property.

How many years can you finance commercial property?

The repayment terms of commercial property lie between 5 and 20 years, according to our research. However, it may depend on the lender or banking institution you choose.

How do I qualify for a commercial loan?

While the loan you qualify for will depend on the type of commercial loan you apply for, here are the most common approval requirements:

  • A credit score of 600+.
  • At least one year in business.
  • A debt-to-service ration of 1.25+.
  • 51% of occupation by the business for commercial real estate loans.
  • Proof of a consistent cash flow.

What qualifies as commercial real estate?

  • Office buildings.
  • Medical facilities.
  • Shopping centers.
  • Apartment buildings.
  • Hotels and resorts.
  • Warehouse facilities.
  • Land developments.

What is considered a commercial loan?

A debt-based funding agreement between a business and a financial institution. A commercial loan is used to fund costly business expenses, including real estate, equipment, working capital, and more.