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Commercial Loan

  • What Is a Commercial Loan?

    A commercial loan is a money-lending arrangement between a company and a financial institution. Businesses typically take out loans because they are expanding at a rate that necessitates some type of expansion, which could include more equipment, office space, or even more robust operations. Many businesses would be unable to meet their growth objectives without the assistance of a loan. However, with the loan, business owners are better able to grow the business and generate the revenue required not only to repay the loan but also to increase their capital.

    How Commercial Loans Work

    Most business owners seek a commercial loan to help them advance to the next stage of their venture. This short-term funding assists the company's operations on a large or small scale. Loans can be used for almost anything, from the purchase of a commercial building to the payment of a large number of contract employees.

    Once a business owner determines that their company requires a loan to continue operations, they must usually approach a financial institution with collateral. If the company defaults on its loan or goes bankrupt, this collateral will become the bank's property.

    • Your company's finances: Similar to consumer loans, an institution issuing the loan will want to take a look at your company's finances, debt service coverage ratio (similar to the debt-to-income ratio for consumer loans), and credit profile to determine your company's creditworthiness and ability to repay the debt. The financial institution wants to see the company's balance sheets to showcase cash flow and any liabilities it currently has.
    • Your personal information: It's common for an individual to have a better credit history and credit score than their business, especially if the business is new. In this case, the bank may request information to assess your personal creditworthiness too.
    • The property you need a loan for, if applicable: If you're applying for a real estate or construction loan for your business, the financial institution may also want information about the property to determine things like appraised value.

    Where to Get a Commercial Loan

    While you may immediately think of a bank for where you should go to get a commercial loan for your business, there are other options. Here are some details about banks and other options for lenders:

    • Banks: Banks typically provide good rates and long-term options to keep payments reasonable for the business. However, they tend to be more selective and the process for acquiring a loan is longer.
    • Commercial lender: A commercial lender is not a bank, but is still able to issue loans. You can expect lower costs and faster approval compared to banks, but the interest rates are usually higher and the loans are short-term.
    • Hard-money lenders: Private companies usually dole out hard-money loans, which are short-term and require little time or documentation for approval. However, these lenders typically charge higher interest rates.
    • Crowdlending: Crowdlending happens on marketplaces where borrowers and lenders are matched according to need. There is little regulation on these platforms, so engage at your own risk.

    Advantages of a Commercial Loan

    It's helpful to know the advantages of a commercial loan so you can make the right decision for your business. Advantages include:

    • Money right away: Even if the loan approval process is lengthy, you'll end up with funds more quickly than saving your revenue and waiting for your available funds to be what you need them to be.
    • Manageable payments: Even if you take out a large loan, you should have a manageable repayment amount every month.
    • Tax-deductible interest: Although you will be paying interest on your commercial loan, the interest you pay is tax-deductible, which can help you at the end of the year.
    • No need to bring on investors: You either started your business on your own or with a core group of people. You could bring on an investor who will supply the business with needed funds, but then you are probably also giving up a part of your ownership in the business in exchange. A commercial loan can give you the capital you need without compromising your percent of ownership in the company.