Commercial Lending Loan
Operating a business isn’t easy: the cyclical nature means that it’s inevitable you will have shortages of working capital on hand. This can be problematic if you have various short-term costs associated with operation, such as payroll, expenses, and inventory purchases. Many businesses use a commercial loan to help bridge gaps in cash flow that may prevent purchases of equipment or investment in a range of necessary items.
By definition, a commercial loan is simply any type of financing that is issued to a business. Commercial loans cannot be issued to an individual directly. The maturity period of a commercial loan can be short-term (30 days) or long-term (up to 30 years), some are secured with collateral while others aren’t. Traditional lenders who provide commercial loans typically require businesses to provide excessive financial information and often require personal insurance on the loan amount.
What to expect from a commercial loan
A commercial bank loan can provide the needed capital for businesses especially those in the initial startup phase of development. In fact, commercial loans are the most common approach new businesses use for their funding sources. Understanding what to expect from a commercial loan process can assist you in being well prepared for what lies ahead in the loan procurement process.
Securing a commercial loan
Commercial loans are provided to a wide range of different businesses to assist them with short-term funding requirements for operational costs as wells for purchasing equipment to help in the operational processes of the business. On many occasions, the loan can be extended to assist the business in meeting its basic operating requirements. These could include paying for inventory, payroll, or supplies used in the production and manufacturing process.
Although a commercial loan is typically thought of as a vehicle for short-term funds for a business, certain banks are also able to provide a renewable loan. This is advantageous for many different businesses because it allows them to obtain the required funding to maintain operations. It also allows for repayment of the pan within a specific time period. Once this time period has passed, the loan can be renewed or rolled into an extra loan period. Businesses typically go for renewable commercial loans when there are large funding needs such as large seasonal orders.
One of the key factors a business owner must take into account when obtaining a commercial loan is the credit score. The creditworthiness of an applicant is an important factor for the financial institution that will be providing the commercial loan. During the commercial loan acquisition process, the business that is applying for the loan will need to provide an extensive amount of documentation. This documentation is usually required in the form of balance sheets, invoice sheets, and other similar documents. These will serve to demonstrate that the company has consistent and favorable cash flow. With sufficient cash flow documentation, the lender will be able to be assured that the loan can be repaid according to the specified terms. In addition, banks normally mandate that monthly financial statements be provided to them by the company throughout the entirety of the loan process. The lender will also necessitate that the company takes out insurance on larger items that are purchased using the funds from the commercial loan.
The Benefits Offered by Commercial Loans
Commercial bank loans are a very popular choice for entrepreneurs since they offer business owners a variety of key incentives. Below are some of the benefits inherent to obtaining a commercial loan:
Lower interest rates – One of the advantages of obtaining commercial loans is that there is a lower interest rate with these types of loans. Typically these loans offer the lowest interest rates of any other type of small business loan.
Critical funding access – Commercial business loans allow business owners to access critical funding while also being able to maintain lower overhead costs. This will ultimately help the business to grow and expand at a much-increased rate.
Long-term loans – An additional benefit of obtaining commercial loans is that they are long term. These loans are usually between 3 years and 10 years in length which allows for gradual repayment. Giving a business time to increase business profits is one of the benefits of longer-term loans such as commercial loans.
Reduced potential for default – Due to the nature of commercial loans having lower interest rates and extended payment terms, the chances for defaulting are reduced. This allows a business to continue to operate while reducing the investment risk as well.
Very large sum approval – Typically lenders provide large sums when approving commercial loans for businesses. This can provide the necessary funding for startup costs.
No collateral required – In general, commercial loans are provided without the need for supporting collateral. This makes it easier for business owners in need of funds to get the capital they need.
Complete ownership of the business is maintained – An additional benefit to obtaining a small business loan in the form of a commercial loan is that full and complete business ownership is maintained.
Commercial Loan vs Business Line of Credit
Instead of obtaining a traditional commercial loan, many businesses opt for a business line of credit. This business line of credit is made available to businesses in need of capital for expenses, emergencies, and short-term purchases. It acts as a revolving line of credit that businesses can access whenever they need to. Business lines of credit can be compared to commercial loans in order to determine which option is best suited to a business’ financial needs.
A permanent source of funding
One of the ways that a business line of credit differs from a standard commercial loan is that it offers a permanent source of funding for a business. The enterprise will use only the capital it needs and will repay that amount right after using it. Once that amount is repaid, they can access additional funding on their line of credit. Contrarily, a commercial loan is funded at the inception of the loan, all at once and in one lump sum. The business owner will use the funds as needed and will make certain that the installment payments will be made on time.
Less stringent upfront requirements
A business line of credit is often a more sought after option for business owners who need funding but who don’t meet the perfect credit requirements of traditional types of funding. When applying for a standard commercial loan, it is necessary to meet the highest credit ratings possible while also providing extensive paperwork detailing the company’s profits.
Lower interest rate
A line of credit normally has a lower interest rate than a traditional term loan which makes it much more appealing for newer businesses. It also typically has lower closing costs as well which is one of the added benefits. One thing to be aware of is that if a payment is late or the borrower goes over the designated borrowing limit, the interest on a line of credit may significantly increase. With a term loan, the interest rate remains the same throughout the entirety of the loan.
When to use each type of loan
There are specific times when it makes sense to use a term loan over a business line of credit. Understanding when to use each type of loan will ensure the very best results for meeting your financial goals.
Term loan uses
In general, a traditional term loan is used for the purchase of a very large business asset such as machinery, computer hardware, software, or for company vehicles or supplies. Term loans allow a business to get the items it needs while these assets provide value to the business for a long period of time.
A business line of credit uses
Typical uses for a line of credit are meeting daily operating expenses, accessing quick cash, and making short-term business purchases. In the event that the business cash flow is dwindling down, or if there aren’t enough funds to cover expansion, then a line of credit can provide the perfect solution. Another instance in which a business line of credit can prove helpful is when there are new customers and the business has an extensive amount of out of pocket expenses prior to the invoice getting paid.
How Can a Commercial Lending Loan Help My Business?
Almost any business can benefit from receiving continual funding to promote growth and sustainability within their company. Once you receive a commercial loan, it is entirely up to your own discretion how the money is spent on your business. Many businesses use their commercial loans for some of the following expenses:
- Investing in additional equipment
- Investing in technology
- Undertaking new advertising and marketing efforts
- Hiring seasonal employees
- Purchasing inventory for seasonal increases in demand
What about fees?
Prior to taking out a commercial loan, it is essential to become aware of any fees that may be associated with procuring the loan. Some of the fees that can be expected when taking out a commercial loan include a credit check fee, a processing fee, and an appraisal fee in the event that the loan was obtained with collateral. A line of credit usually includes a processing fee, another credit fee, and a fee is also assessed every time that the borrower takes out extra cash against the credit line. Being cognizant of these related fees can help to keep fees to a minimum as you place a cap on the number of withdrawals on the business line of credit.
What’s the Process?
Acquiring a commercial loan through a traditional lender can be a hassle depending on how old your business is. Many lenders will want extensive company information including revenue data, profit and loss summaries, credit histories, and a range of other complex documentation. This can be especially problematic for individuals who own small businesses — if you have only recently started your company you may not have the necessary information to get a commercial lending loan through a traditional lender. In addition, the length it can take some banks and financial institutions to provide you with a lending decision can often be weeks or even months. This can destroy your ability to take advantage of certain opportunities. In rare circumstances, it could even severely damage your business if you are unable to meet certain cash requirements or bill payments.
Apply For a Commercial Loan Today!
When you need a commercial loan, we make sure that you can apply safely and securely through our online portal. We offer all of the tools needed to make the loan process as simplified as possible. We are able to provide our clients with access of up to $150,000 in working capital. But don’t wait for an emergency or opportunity to arise, apply today through our easy-to-use online portal!
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