How to Find the Right Commercial Loan for Your Business

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Updated on Tuesday, January 22, 2019

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.

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