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Small Business

How to Find the Right Commercial Loan for Your Business

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Commercial business loan
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When companies need funding to make a real estate purchase or other major capital expenditures so they can grow the business, they may seek out a business loan from commercial loan companies. Commercial business loans are typically short-term sources of funding that solve a distinct need. However, some businesses that regularly get large amounts of seasonal orders, opt to use commercial loans that can be renewed to handle each seasonal influx.

How to choose the right commercial loan for your business

The following commercial loans have varying requirements for applicants. The loan that works for your business will depend on factors like how much you need to borrow, what the loan will be used for, how long you’ve been in business, and the solvency of your company. Read on to get a sense of the typical requirements, loan ranges and rates for each type of loan.

6 best commercial loan options

SBA loans
For businesses that may have good credit, but don’t qualify for a traditional business loan (and this includes many small businesses), Small Business Administration-guaranteed loans offer many more options. Banks are more likely to approve these loans because they’re less risky, since they are guaranteed by the SBA.

SBA loans come in different forms. The 7(a) program is the SBA’s all-purpose loan of up to $5 million for almost any small business use. The average approved amount is $407,616.

The SBA’s 504/CDC loan program provides long-term (10-year) fixed rate loans for purchasing or renovating commercial real estate or purchasing equipment. A down payment (10 percent, though it can be lower) is required and typically 50 percent of the project’s costs are provided through a private sector lender with the remaining 40 percent coming from a Certified Development Company.

Applying businesses will have to prove profitability, stability and sufficient cash flow by supplying a balance sheet, profit and loss statements, business tax returns, personal tax returns, a business plan and a business debt schedule.

Even for those borrowers who don’t fit the preferred profile, SBA has a microloan program, offering amounts of up to $50,000, with the average amount being $13,000.

The SBA considers a small business to be any that have a net worth less than $7 million and net profits after tax of $2.5 million.

Traditional term loans

Term loans are what you probably picture when thinking about a loan — long- or medium-term loans that are paid back over the agreed-upon time span plus interest. Medium-term loans allow businesses to borrow funds for a specified term — usually one to five years — for uses like real estate or equipment. They are best for businesses with very good credit that need to fund equipment or real estate purchases.

Term loans from the low five figures to $5 million are typically only an option for established businesses with very good credit and a large down payment. But if you can get approved, they usually have the best rates compared to others listed on our site, like 10% APR or less. Online lenders offer medium-term loans with higher rates, going up to 30%.

There might be origination fees of around 3%, closing fees, or prepayment penalties. Term loan rates may start out low, but be aware that if your rate is variable, it’s subject to change.

Short-term loans

For businesses that need cash fast, short-term loans are another option that can provide it, although the amounts top out at a lower maximum than traditional medium- or long-term loans. Short-term loans must be repaid within three to 18 months. Short-term loans make sense for businesses that need extra funds to fill a big order and can then pay it off quickly.

Short-term loans, with a typical range of $2,500 to $250,000, have an easy approval process (possibly even same-day approval). Lenders require very little paperwork, and even bad credit can be approved.

The tradeoff for this expediency and leniency is that short term rates are not good. The low end is 8.5%, but they can soar to 80%. Short-term loans may come with prepayment penalties, and origination, documentation and other fees.

Equipment loans

Also called heavy equipment financing and construction equipment financing, this type of financing is used when a business needs to make a major equipment purchase, such as for construction trucks, business vehicles, and other expensive equipment. It’s used by construction companies, landscape contractors, loggers, farmers and many others.

To apply, you will need your credit score, business tax returns, and a quote for the equipment you wish to buy. Although most banks require the loan to be secured by collateral, some lenders will allow you to use the equipment as collateral, so your other assets are not at risk. It also means you are likely to get better loan rates on heavy equipment than with other types of loans. Loans can be for amounts up to 100 percent of the purchased equipment.

Rates for equipment loans can be as low as 0 to 5% for dealer financing, with some major bank financing starting at 4.75% and 7.25% and some non-traditional lenders spanning from 4.99 to a whopping 30%. Depending on your credit history, you might need to put a down payment on your equipment loan.

Commercial real estate loans

Commercial real estate loans are extended to businesses that need to purchase land or business structures, construct new buildings, or upgrade buildings and grounds that are already owned. They can help business owners to build warehouses, offices, and manufacturing plants or to add a new location of their business.

The lenders come in several types with differing requirements, and the property itself acts at the collateral. Banks offer traditional and SBA 504 commercial real estate loans. Borrowers with less-than-stellar credit, but profitable businesses can look into online lenders and there are also crowdfunding options where commercial real estate loans are funded by groups of investors.

Two metrics come into play with commercial real estate loans: Loan-to-Value (LTV) and After-Repair Value (ARV). LTV shows what percentage of your property value your loan is. A borrower taking a $800,000 loan on a $1 million property would have a LTV of 80%, which is about what you can expect from a bank, with hard money lenders offering lower LTVs. If you’re planning to renovate the property, hard money lenders will loan 50 to 70% ARV.

Typical rates for loans of $200,000 to over $20 million can range from 5% to 30% over a term of 20 to 25 years. Commercial real estate loans may have origination fees of 1% or more.

Business lines of credit

A business line of credit works similarly to credit cards: it lets a business borrow up to a certain amount, but they only have to pay interest on what is borrowed. Once that amount is repaid, you can borrow up to the entire limit again automatically, with no need to reapply — it’s revolving. This makes it one option that works for those businesses that need to handle seasonal surges in orders.

That flexibility is the appeal. Loan amounts range from $5,000 to $1 million and the rates vary greatly as well, from around 7% to up to 40%. To apply with a bank or an online lender, you will need to be in business a minimum of six months with a minimum of $25,000 in annual revenue. More creditworthy businesses will get the most favorable rates and higher credit lines.

Payment may be required daily, weekly or monthly with a business line of credit.

Applying for a commercial loan: required documents

Whatever the type of commercial loan, you’re going to need to prepare some paperwork. In addition to basic information like your Social Security number, income, tax ID, number of employees, and the length of time you’ve been in business, it can include:

  • A business plan
  • An expense sheet, showing costs like office space, insurance, employee salaries and inventory
  • Cash flow forecasts
  • Collateral list
  • Both your business and personal tax returns
  • Information on intended loan use
  • Business debt schedule

The bottom line

The state of your business, credit and what you need the loan for will determine which of the above loan types are best to pursue, and within each of the categories you can find a range of offerings. Do your homework, including calculating all fees, and you can get what you need from those borrowed funds — and pay them back on time.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Small Business

The Best Commercial Finance Companies to Work With This Year

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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When a new or established business needs to build a new headquarters, or make any number of other capital expenditures so it can grow as a business, it may use a loan from a commercial finance company.

These loans are typically short-term sources of funding addressing an immediate need; however, some businesses keep open an ongoing line of credit to dip into at busy times.

What types of loans do commercial finance companies offer?

  • SBA loans: U.S. Small Business Administration-guaranteed loans provide options for borrowers who may have good credit, but don’t qualify for a bank loan. Banks are more likely to approve these loans because they’re less risky, since they are guaranteed by the SBA. There are several types of SBA loans, including the popular 7(a) program, the 504/CDC program for commercial real estate, as well as microloans, which are smaller amounts ($50,000 and under) that can be extended to borrowers with less-than-stellar credit. The SBA also guarantees export loans, lines of credit and disaster loans.
  • Term loans: Traditional term loans refer to long- or medium-term loans that are paid back over the agreed-upon timespan plus interest. As commercial loans, they are best for businesses with very good credit that need to fund equipment or real estate purchases.
  • Short-term loans: When businesses need cash fast, and for businesses without great credit, short-term loans can provide it, sometimes with same-day approval. The tradeoff is that the rates are higher than with long- or medium- term loans. Short-term loans must be repaid within three to 18 months.
  • Lines of credit: A business line of credit works like a credit card: it’s revolving credit, allowing a business to borrow up to a certain amount, but interest is only charged on the amount used. Once that amount is repaid, you can borrow up to the limit again automatically, with no need to reapply. This makes it an option for businesses that experience seasonal surges in orders. With lines of credit, loan amounts and rates both vary greatly.
  • Equipment financing: Equipment loans are used when a business needs to make a major equipment purchase, such as for heavy construction machinery, trucks and other expensive equipment. In some cases, the purchased equipment stands as the collateral, so your other assets are not at risk.
  • Invoice financing: Also known as accounts receivable financing, this loan allows financing companies to advance cash with your outstanding invoices as collateral. It often costs more than traditional financing.
  • Merchant Cash Advances (MCAs): The MCA is an unsecured offer of cash in exchange for either a percentage of future sales, or else you repay it with daily or weekly bank account debits. It’s available to companies that have been in business for at least five months, with more than $75,000 in annual revenue. While businesses with credit scores as low as 400 can qualify, the steep fees associated with this should make any small business think twice — APRs can be in the triple digits.

Banks vs. alternative lenders

Banks, considered traditional lenders, are known entities, and because they are often massive corporate institutions, they offer a host other financial services in the same integrated ecosystem. Based on our research of top banks around the country, Banks generally have the best rates, but they are the most discriminating in who they approve for loans. For the small businesses that do qualify, the application process can still be formal, bogged down in paperwork and slow.

Online lenders open up many funding options for borrowers with less favorable profiles, like lower credit scores or bad credit. Plus, they usually have informal, accelerated application processes with little or even no paperwork. The tradeoff for the flexibility, convenience and leniency is higher interest rates.

Best commercial finance companies for each loan type

Term loans

Funding Circle has some of the lowest rates for business term loans of $25,000 to $500,000, ranging from 4.99% to 24.99%. Loans are for one to five years with fixed payments and no prepayment penalties. To get these rates, Funding Circle requires a credit score of at least 620 and your business has to have been active more than two years, with no revenue minimum.

The Business Backer offers term loans of $5,000 to $200,000 for one to four years, with interest rates starting at 1.70%. The streamlined process begins by filling out an application on The Business Backer and providing four months’ worth of bank statements, and funds may be in your account within 48 hours.

Short-term loans

Loan Builder, which is owned by PayPal, has fixed-fee pricing ranging from an impressive 6.49% to 49.99%, with no origination or early repayment fees. LoanBuilder loans are $5,000 to $500,000 and must be repaid in terms ranging from 13 to 52 weeks. Businesses must have at least nine months under their belts and $42,000 in annual revenue.

Fora Financial offers small businesses working capital from $5,000 to $500,000 on terms of up to 15 months. Using Fora Financial’s one-page application and some bank statements, you can get approved in as soon as 24 hours, and approval is not based entirely on your credit. Also, not only does it not charge a fee for early payment, Fora Financial also has early payment discounts.

Lines of credit

Kabbage offers small businesses short-term loans of up to $250,000 for 6 to 18 months, once you draw from the line. Kabbage works on a monthly fee basis (and no prepayment fees). There’s no minimum credit score to apply. Small businesses can apply online or on the Kabbage app, and the app makes it simple to transfer money into your business’ account when the need arises.

Rapid Finance extends lines of credit of up to $500,000 to small businesses for any purpose, whether it’s to get through slow periods or keep up with rapid growth, and approval is not based on your credit alone. Rapid Finance also offers loans.

Equipment financing

Direct Capital helps businesses buy equipment costing up to $500,000 (if application only) or up to $1 million (if providing financials), and repay it monthly over six to 72 months, with rates starting at 5.49% up to 24.90%. Applicants to Direct Capital should have at least two years in business and bring in $150,000 in revenue annually, with a credit score of 620 or above.

National Funding offers equipment funding of up to $150,000 as well as equipment leasing. Applicants must have a credit score of 620 or higher and have been doing business at least six months. National Funding offers deferred payment options, allowing business owners to pay seasonally or quarterly or even skip payments.

See our top picks for equipment financing companies.

Invoice financing

Paragon Financial Group offers advances up to 90 percent on accounts receivable, from $25,000 to an impressive $10 million, on the day the work is completed. Paragon rates vary, but can be 1.25 to 2% per 30 days, with an origination fee, and the rate paid includes credit protection and accounts receivable management services. Businesses will need an annual revenue of at least $300,000 to qualify.

BlueVine is a fast option (10-minute application, 24-hour funding) for small businesses looking to factor $5,000 to $250,000 in invoices monthly, with 85 to 90 percent of the invoice amount advanced. The discount rate starts at a low 1% per month. BlueVine requires a minimum credit score of 530 for its invoice factoring service.

Merchant cash advances

CAN Capital offers merchant cash advances of $2,500 to $250,000 with payments on variable daily amounts and a $395 administration fee. CAN Capital’s factor rates can have a range of 1.15% to 1.48%. The preferred minimum amount of time in business for applicants is 12 months, and a minimum 600 credit score, or 550 if they have six or more years in business.

Credibly offers MCAs of up to $400,000 with factor rates as low as 1.09% and terms of three to 18 months to businesses with credit scores of 500 and up, with six months in business. To qualify for a Credibly MCA, businesses must also have an average of $15,000 or more in monthly bank deposits. There is an underwriting fee of 0.00% - 2.50% of the total advance amount.

The bottom line

For businesses needing an influx of funds, the commercial finance company marketplace is full of choices, and it’s easy to compare them all online. Do enough preparation and research and the right loan should emerge from the pack.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How Does a Business Loan Work? Here’s What to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Small business loans
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Most new businesses need an influx of funding to get going, and for many founders, using personal savings is not going to be enough. The modern landscape offers a range of financing options like venture capital from investors and crowdfunding. But when you need to fund a fledgling business and you want to keep total control, it’s time for a small business loan. Let’s take a look at a how business loan works.

Types of business loans

To apply for any of the following loan types, you’ll need to provide the following basics: your driver’s license, a voided business check, and bank statements. The descriptions will tell you what else you need to apply, as well as factors like minimum annual revenues and loan amount ranges.

Long-term loans

A term loan allows businesses to borrow funds for a specified term — usually one to five years — for uses like real estate or equipment. And it can be a significant amount, five figures up to $500,000. These are typically only an option for established businesses with very good credit and a large down payment. Long-term loans usually have the best rates, like 10% APR or less, but are the most difficult to get approved for. You’ll need to show a balance sheet, profit and loss statements, a credit score, and both business and personal tax returns.

Short-term loans

For businesses that need cash fast, these loans can provide it (from $2,500 to $250,000), but must be repaid within three to 18 months. They’re easy: very little paperwork, and even bad credit will work. However, the associated costs are higher than with long-term loans. There are times when short-term loans might make sense, like if you need extra funds to fill a big order and can then pay it off right away. You will have to supply the lender with proof of ownership, a credit score and personal tax returns.

Equipment financing

Also called heavy equipment financing, this type of financing is used when a business needs to make a major equipment purchase, such as for construction vehicles. To apply you will need your credit score, business tax returns and a quote for the equipment you wish to buy.

Invoice financing

Also called accounts receivable financing, this involves financing companies advancing cash with your outstanding invoices as collateral. This is another option that often costs more than traditional financing. When applying for invoice financing, you will need your credit score and those unpaid invoices.

SBA loans

If you don’t have luck getting a traditional business loan, options still abound in the form of Small Business Administration-guaranteed loans. The banks extend these loans because they’re less risky, as they are guaranteed by the SBA. Applicants will need to show a balance sheet, profit and loss statements, business tax returns, personal tax returns, a business plan and a business debt schedule.

Business lines of credit

A business line of credit works similar to the credit card model: it offers a business funds to borrow up to a certain amount, but they only pay interest on the amount that is borrowed. You will need to be in business a minimum of six months with a minimum of $25,000 in annual revenue to qualify. The loans are usually from $5,000 to $150,000. To apply, you’ll need to supply a balance sheet, profit and loss statements, business tax returns and personal tax returns.

Merchant cash advances

Proceed with great caution when it comes to merchant cash advances. The MCA is an unsecured offer of cash in exchange for either a percentage of future sales, or else you repay it with daily or weekly bank account debits. It’s available to companies that have been in business for at least five months, with more than $75,000 in annual revenue. You will need to supply your credit score, but it’s probably not going to be an issue, as scores of 400 and up are accepted, as well as business tax returns and credit card processing statements. The steep fees associated with this can be crippling to a small business — think triple-digit APRs, or paying $70,000 for a $50,000 MCA over three to 12 months. There are numerous downsides to the MCA, so be sure to do your research if you’re considering it, and to investigate all options open to your business.

How the business loan application process works

To ensure you’re asking to borrow the right amount, and to present the best case to your lender, you’re going to need to prepare some paperwork, sometimes including:

  • a business plan, which usually come in the form of traditional, more longer form plan, or lean startup, which may be only a page long
  • an expense sheet, where you show your startup costs including things like office space, insurance, employee salaries and inventory
  • five years’ worth of financial projections

Once these documents are gathered, the SBA recommends contacting multiple banks and credit unions so you can make an informed decision and get the best terms.

Austin Schlenker is an international and export sales strategy expert who started out in business at a young age, so he didn’t have a track record or significant credit history. What worked in his case was putting up securities to open a small business line of credit.

While his initial experience won’t necessarily mirror that of other small business owners, his overall takeaway can be widely applied: “Build a relationship [with your bank], go into a branch and introduce yourself and your business. Allow the bank to see the value in working with you.”

Consider the types of loans you will qualify for

Factors like your business’ creditworthiness, amount of time in business, and annual revenue are going to determine both the types of loans you will qualify for and the rates you are offered.

If you’re choosing an option with a factor rate, be sure you understand what it works out to in APR.

The bottom line

There are many choices for small businesses that need funds, both from traditional banks and online lenders to infuse funds to a small business. This means that there are many different ways to the question, “how does a business loan work?” Knowing the ins and outs of your options will help you narrow down those choices and apply only to the ones that are a good fit for your situation.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.