Commercial Loan Definition, Types, & Where To Find The Best In 2023

Sometimes called medium or long-term loans, installment loans are what most people think of when they hear the word loan. In most cases, a business that successfully applies for a term loan will receive a lump sum of cash which can then be used for business expenses. In some cases, there may be restrictions on what the money can be used for. These loans will generally last between one and 10 years, accruing interest along the way. The longer the term, the more expensive the loan will be in the long run.

In most cases, you’ll make fixed, monthly payments to your lender. The loan is considered paid off when you’ve paid back the money you’ve borrowed plus the interest you’ve accrued along the way.

Short-term loans don’t last that long, usually less than a year, so they don’t have time to accumulate a lot of interest. Because of that, most short-term loans charge a flat fee rather than a true interest rate. This flat fee may be expressed as a percentage (18%) or as a multiplier (1.18). In either case, to figure out how much your flat fee is in dollars, multiply that number by the amount you’re borrowing.

Short-term loans are more expensive than other term loans and feature expedited application processes.

Unfortunately, your repayments are also sped up, with fixed payments made weekly or even daily. These payments are almost always automatically deducted from your bank account. As in the case of term loans, these payments are fixed (with some rare exceptions).

The Small Business Administration (SBA) is a federal agency tasked with promoting and assisting American small businesses.

The term SBA loan is a little bit misleading because the SBA doesn’t usually originate their own loans. Instead, they work through banks and private lenders, guaranteeing a percentage of the borrower’s debt. This reduces the risk to the lender and allows businesses to qualify for rates and terms they may otherwise be unable to get.

The two most popular programs are the SBA 7(a) and the CDC/504. The 7(a) loan is the more popular of the two. It covers typical working capital expenses as well as site improvements and business acquisitions. 504 loans are oriented more toward economic development.

The major drawback to SBA loans is that they have a longer and more complicated application process than term loans. While SBA Express loans speed up the process a bit, don’t expect to have the money in your account right away like you would with short or term loans.

If you plan on buying equipment with your loan, you may want to consider an equipment loan. Equipment loans look a lot like term loans, but rather than being open-ended are specifically used to cover a percentage (85% is typical) of the cost of a specific piece of equipment.

Equipment loans use the equipment you’re purchasing as collateral, meaning you get the benefits (lower rates, longer terms) of a secured loan without putting up any of your own assets.

If you aren’t sure of your expenses in the coming year, anticipate a large number of small purchases, or want something to fall back on in case of an emergency, a business line of credit might be the best option for you!

Your company will be approved up to a certain credit limit, and you can draw upon that line of credit any number of times until you’ve reached the max amount of the loan. You’ll only pay interest on the amount of credit you’ve used, which makes lines of credit much more versatile than other types of loans.

There are two kinds of lines of credit:

• Revolving: Any balance you pay off becomes available for use again.
• Non-Revolving: Any balance you pay off is unavailable for use again. Once the credit is used, it’s gone.

The convenience of this type of loan comes at a premium. Lines of credit typically have higher qualifications than loans, and many come with annual or even withdrawal fees. They also typically feature variable monthly payments, but some do offer no-interest grace periods.

While the following products aren’t loans, they’re worth learning about because you’re more than likely going to run into them in your search for commercial loans. Read on for a quick rundown.

• Merchant Cash Advances (MCAs): Rather than lending you money, a funder buys a percentage of your future credit/debit card sales. MCAs fall into the same niche as short-term loans. You get a lump sum of money, are charged a flat fee, and make daily payments. Instead of fixed payments, however, your merchant cash advance funder will take a percentage of your daily card sales. Because MCAs aren’t loans, they aren’t governed by laws affecting loans. This allows them to be offered to riskier borrowers at a higher rate.
• Capital Leases: These are an alternative to equipment loans. While the word “lease” suggests renting, capital leases are actually designed with ownership in mind. You’ll receive the full cost of the equipment covered in exchange for a higher interest rate. Like a term loan, you’ll pay a capital lease off monthly and at the end of the lease there will be a small remainder (as low as $1) you pay to close the transaction, this is called a residual.
• Invoice Factoring: With invoice factoring, you’ll be able to get an advance on your accounts receivable by selling them to a factoring company at a small loss. That company then collects the invoice in your place. You’re paid the majority of the invoice’s value as a lump sum upfront, with the remainder paid out to you (minus a fee) when and if the factoring company collects on the invoice.

Your credit rating matters when you’re looking for financing, the real question is: how much does it matter?

If you don’t meet the minimum standard for conservative lenders, they simply won’t work with you. The minimum for traditional banks and SBA loans is typically in the mid to high 600s.

Alternative lenders tend to have less strict guidelines. Some of them impose minimums that they won’t go below, but others don’t use credit scores for rule-out criteria.

No matter what, pretty much every lender, traditional or alternative, will use your (or your business’s) credit history to determine what rates they can offer you.

The next important thing lenders will look at is whether or not your business has staying power. A business that’s been successful for five years inspires more confidence than one that is still three months away from opening.

Not every lender, however, is looking for the same thing.

A traditional bank may want you to be in business for two to three years before they’re willing to take a risk on you. Online short-term lenders could only be looking for six to as low as three months in some cases.

Any lender worth their salt is going to want to know that you’re able to pay them back. Even alternative lenders with looser credit prerequisites, especially those that deal in unsecured loans versus secure loans, will need to see your bank statements to get a sense of your cash flow.

The more revenue your business earns, the more credit a prospective lender is going to be willing to extend to you.

Be sure that the lender you’re considering works with businesses in your industry and state.

Banks tend to lend mainly through their physical branches and may require an existing business checking account through them. Alternative lenders operate mostly online, but due to differences in lending regulations between states, may not be able to lend or offer all of their different products to you.

When you’re assessing your need for a secured loan or line of credit, you’ll have to be able to put up collateral to secure your funding. The qualifications for collateral vary between lender and product but can include cash deposits, inventory, equipment, or real estate.

Most lenders will advertise the minimum and maximum amounts they’re willing to lend. You need to be certain that the lender is capable of giving you the funding you’re seeking.

Banks can offer larger amounts of money than alternative lenders, typically. One of the easiest ways for a small business to qualify for large amounts of funding is through an SBA loan.

How long do you need to pay your loan off?

This is a complex question, and there’s no right answer. A shorter term length usually means lower interest rates than a longer one, but paying off your loan quickly may stress your cash flow in the short term. You should have a good sense of your revenue ebb and flow before applying for any financing.

Short-term lending products do not come with lower interest rates or fees than long-term loans. These products tend to be the most expensive option for funding. If you have time-sensitive expenses, it might be worth paying more to get the funding as fast as short-term lenders or MCA providers can get money into your hands.

You should always get the lowest interest rate you can when you borrow money.

Annual percentage rates (APRs) are one of the easiest ways to make direct comparisons between different products. Short-term loans use flat fees rather than interest rates, so you aren’t able to use APRs to compare; there are other tools available to help you make the conversion.

Lenders don’t always mean the same thing when they say “interest.” The percentage you see or are offered may be annual or monthly. In some cases a flat fee may even be described as an interest rate by some lenders.

Transparent fees aren’t interest rates or flat fees. These are costs associated with the loan outside of those fees. Not all lenders will charge a fee for every product. Some may even offer promotions that waive some of these fees!

The most common fee you’re probably going to encounter is the origination fee. This fee usually ranges from 1%-4% of the amount you’re going to be borrowing. This isn’t a fee that you pay out of pocket, it’s instead deducted from the lump sum you receive from the lender, so make sure you take this fee into account if you’re counting on every cent of your loan.

You may also be charged for setting up accounts from which to withdraw automated payments, for late payments, or miscellaneous administration fees. Any lender who charges anything beyond an origination fee should be approached with caution. No matter what, take these additional costs into account when considering the amount of debt you’re taking on.

Commercial loans work like any other type of loan. The borrower receives a lump sum of money and must repay the borrowed money plus interest in fixed installments over a set period of time.

Commercial loans and business loans are very similar. The terms “business loan” and “commercial loan” are often used interchangeably. However, some lenders might specifically use the term “commercial loan” to mean “commercial real estate loan.”

It can be hard to get a commercial loan if you don’t have a strong borrowing profile. Regardless of your strength as a borrower, the process can be time-consuming.

A commercial loan term could range anywhere from six months to 30 years, depending on the purpose of the loan, the type of loan you’re getting, your strength as a borrower, and other factors.

Your ability to qualify for a commercial loan depends on your strength as a borrower. Your lender will assess your strength using metrics such as your credit score, revenue, and so on.