What is a Commercial Loan?

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.

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 - Learn about the best types of loans and the best lenders.

Equipment Financing - Learn more about equipment financing options.

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

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.

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 of 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 similarly 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 a 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.

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.