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How to Find the Right Commercial Loan for Your Business

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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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The Best Commercial Finance Companies to Work With This Year

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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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Pay Down My Debt

Zombie Debt: What It Is and How to Deal With It

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When you leave a legitimate debt unpaid, it can’t simply be written off as dead, even though significant time may have passed. It can come back to haunt you, like a zombie rising from the grave. When that happens, it’s called zombie debt. For many consumers, the news that a zombie debt has arisen arrives by phone with a call from someone trying to collect payment from you. Or it may come through the mail, or via text message.

Even people who have no unpaid debts may get a collection call or letter. “Every old account you’ve ever had can come back to haunt you,” said Steve Rhode, otherwise known as the “Get Out of Debt Guy.” “Just because someone makes a claim (that) you owe an old debt, doesn’t mean you do or that the balance is correct.”

So while debt collection calls can be alarming and unwelcome, you might not be on the hook to pay anything.

Follow these steps if zombie debt is chasing after you:

6 steps to deal with zombie debt

1. Don’t agree to anything

The first tactic for anyone who gets contacted about a debt: Don’t offer any information or agree to anything before you find out all the relevant facts.

“When an old debt resurfaces, it is a request for payment,” Rhode said. “As a smart consumer, you should investigate the matter and gather facts so you can make an educated decision if this is just a ploy to trick you to pay money you don’t owe, or a legitimate claim.”

The reason: Some debt collection scammers attempt to collect debts that aren’t owed, or to gather personal information. So if you are contacted, don’t correct an incorrect phone number or other personal information.

2. Ask for additional information on the debt

The next step is to get all the information and documentation so you can determine if you are responsible for paying the debt.

“To investigate the debt you should first never admit the debt is yours or valid while you investigate. A collector can use that against you. Instead, you should politely ask the collector to prove you owe the debt. This is called debt validation.”

Don’t have any discussions until you get the debt validation. Do this whether or not you think the debt is valid, and get the paper trail started. It also buys you a little time.

Within five days of initial contact with you, the debt collector must provide the following information in a debt validation letter:

  • The creditor
  • The amount owed
  • State that you can dispute the debt and if you don’t dispute it within 30 days, it will be assumed to be valid
  • State that if you do dispute, you are entitled to a verification of the debt from the collector
  • For debts with a secondary creditor, they must give the name of original creditor if you request it within 30 days

3. Research the debt collector

If you still don’t recognize the debt after getting the letter of validation, research the company that’s trying to collect.

Get the collector’s name, and the name, address and phone number of the company. Any legitimate company will provide this information. Look up all the information on the internet. See if the Consumer Financial Protection Bureau has any record of problems with the collector.

Also reach out to the original creditor and see if the claim is valid and if the collector is authorized to collect this debt. You can also request a copy of your credit report to see if the debt is on it.

4. Check if the debt is within its statute of limitations

If it is a valid, unpaid debt, look up the statute of limitations.

The debt collector can’t sue if your debt is past the statute of limitations, which differs from state to state and by debt type. (The four categories of debt are oral agreements, written contracts, promissory notes, and open ended accounts.) It usually begins when you first miss a payment on a debt.

The lengths vary by state and can be as short as three years for a written contract in six states including Delaware and the Carolinas, or as long as 15 years for written contracts in Ohio.

Whenever that period is over in your state, the debt is considered “time-barred.” Keep in mind that because the statute of limitations has passed doesn’t mean creditors can’t try to collect on time-barred debts, it just means that they can’t sue. If it’s not too old, that negative information may also stay on your credit report, typically for seven years.

So, if it’s time-barred, and you don’t have to pay, should you pay? That’s your decision to make. You may want to close that debt if it’s affecting your credit score (check your credit report).

But be careful about making a payment on an old debt. Depending on location, if you make a payment or even acknowledge your debt in writing, that could reset your statute of limitations. In some states, it’s considered “revived” (in additional zombie-evocative terminology). Then they would be allowed to sue, and possibly also get interest and fees.

If you do get sued for a time-barred debt, don’t ignore it or the judgment could go against you. Show your debt verification, and show your proof of your last payment.

5. Dispute the debt if it isn’t yours

Within 30 days of getting your validation notice, you must respond to the collector, stating specifically why you don’t think you owe this debt (assuming it isn’t yours). Make a copy of the letter and consider sending it via certified mail with a return receipt. The collector must then stop contacting you, unless they can document verification of the debt.

If the debt appears erroneously on your credit report, you should dispute that as well.

6. Repay the debt if it is yours

If you do owe the debt, and it’s within the statute of limitations, work out a repayment plan.

If you can pay the debt, it’s time to pay so you can go forward with a clear record. If not, you may be able to work with the collector and pay it off for a lower amount. Just be sure to get the terms of the agreement in writing stating it releases you from obligation. Keep a record of your payments.

Communicating with debt collectors

If you need to contact a debt collector, you may want to consider using any of one these sample letters provided by the CFPB. These letters may be useful for the following situations:

  • Requesting more information about the debt
  • Disputing the debt and asking the debt collector to provide proof or end communication
  • Outlining when and how often the collector may contact you
  • Informing the collector that the consumer has hired a lawyer (after this, the collector must communicate through your attorney)
  • Telling the collector to cease all contact (for example, if you have a time-barred debt that you are not legally obligated to pay)

Keep copies of any letters you send, and consider sending them via certified mail with a return receipt to document the collector receiving it.

Know your rights when dealing with debt collectors

The Fair Debt Collection Practices Act (FDCPA) went into effect in 1978 to regulate debt collection and prevent abusive collection tactics. Today, it’s mainly enforced by the CFPB.

Among its practices: Debt collectors must contact you at convenient times, between 8 a.m. and 9 p.m., unless you agree to another arrangement.

The FDCPA forbids many other abusive, deceptive or unfair collection practices as well. When trying to collect a debt, debt collectors can’t harass or use profane language. They can’t threaten arrest.

Debt collectors can’t call you at work if they are told you can’t take calls there. They may contact others (such as neighbors and friends) to locate you, but typically only once. They can, however, discuss the debt with your spouse.

They can’t call over and over intending to annoy you, or communicate or leave a message in a way that might be seen or heard by others than the intended recipient. They cannot publish debtors’ names on a bad debt list.

Essentially, if a debt collector is behaving disrespectfully, aggressively or in a manner or that you suspect is dishonest, take a look at the FDCPA to see if it’s legal. The CFPB also collects complaints about debt collection problems and about specific debt collectors, and will contact the company collecting to determine next steps. Consumers can also see if others have had similar experiences with those companies.

You can also report problems with debt collectors to your state attorney general’s office and to the Federal Trade Commission online or by phone at 1-877-382-4357.

If you believe the debt collector has broken the law, you can sue within one year of the activity. Consumers can sue for any damages they can prove or they may be awarded up to $1,000 plus reimbursement of attorney and court costs, or a class action lawsuit may be awarded up to the lesser amount of $500,000 or 1 percent of the collector’s net worth. If your debt is valid and within the statute of limitations, suing the collector will not erase the responsibility for paying it.

Conclusion

If you get a dread-inducing phone call or letter informing you of collection of an old debt, the manner in which you respond is crucial.

“Contact from a debt collector can be stressful and frightening,” Rhode said. “But keep in mind the initial contact is just a request for payment and may not be based on the accurate or factual information. I’m blown away all the time with the number of people who just assume the collector is correct or who fail to show (up) in court when they are sued over a debt they don’t owe and lose by default.”

But if you are well informed, there’s a much better chance you can turn matters in your favor.

“If you want a successful outcome, you must get involved, take action, participate, and approach it like you are gathering facts and avoid getting hostile or emotional until all the data is in.”

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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