What is the Difference Between Commercial Loans and Business Loans?
June 21, 2022 | Last Updated on: June 2, 2023
June 21, 2022 | Last Updated on: June 2, 2023
In this article, you will learn:
Funding a business can be a major challenge. It’s standard practice for businesses of all shapes and sizes to secure loans to help them get started and grow – but knowing what type of funding to look for as a potential borrower is often confusing.
To get on the right track, it’s important to understand the terminology used in business financing. Specifically, you’ll want to have a solid grasp of the types of loans available to you as a business owner so that you know what financing options are on the table.
Let’s dive in.
Let’s get right to the title question of this article – yes, commercial and business loans are, generally speaking, the same thing. Whether you use the word “commercial” or “business” to describe this type of loan, you are talking about a financial institution loaning money to a business (rather than an individual) with specified terms of repayment.
Having said that, while there is no formal difference between these two terms, you might find that in the vernacular, “commercial loans” is more commonly used when referring to loans given to larger businesses, while “small business loan” is used to refer to loans given to smaller companies
Why does it matter? If you are a small business owner and you see loans that are marketed to commercial clients, that’s probably not a product that will fit your needs. On the other hand, if you’re running a large-scale operation, you’re probably not going to be interested in products marketed with “small business loans.”
One of the things that many business owners struggle with is that there are so many types of loans available that it’s hard to make sense of them at first. Especially when each loan is designed to meet a specific business need.
So before heading out in search of a general “business loan”, it will be more productive to think about what type of loan you need and how the money will help your business grow and thrive.
Some of the common types of commercial loans used by small businesses include the following:
There is something to be said for the idea of getting a business off the ground without a loan – and then bootstrapping it, or continuing to run it without outside funding. You might be tempted to go this route and do it all on your own, however doing so will frequently put you at a significant disadvantage compared to the competition.
When used properly, a commercial loan can go a long way toward improving the prospects of your business. Here are just a few of the things a loan can help you do:
We’ve already mentioned the importance and popularity of SBA loans in this article. Let’s come back to that topic now by looking a little closer at the types of funding available through the SBA program. If you decide to pursue this type of loan, you can work with Biz2Credit to go through the application process to check your eligibility.
For the small business that only needs a modest loan, an SBA microloan is a great option. The limit for this program goes up to $50,000, which isn’t a huge amount of money in the world of commercial lending, but it can still make a big difference for many small businesses. The use options for microloans are many, including buying inventory, managing startup supplies, acquiring equipment, and much more. Finding a microloan with good repayment terms for your business needs can be a turning point for your company.
This is the standard type of SBA loan and the one you’ll probably start looking at first. Unlike the microloan program, which only grants up to $50,000, you can borrow as much as $5 million for the loan amount with this loan program. Of course, you will have to qualify for whatever amount of money you hope to secure for your business, and your credit history and current business revenues will play a part in that qualifying decision.
It should be noted that businesses need to be operating at a profit if they are to be eligible for an SBA 7 loan. Other items on the loan application include doing business in the United States, demonstrating the need for this loan, and not having any outstanding debts with the government. Plenty of documentation will be required to prove your creditworthiness for this category of lending, including income tax returns, business plans, leases, financial statements, and many other pieces, so the process for receiving funding can be lengthy.
If you have a project in mind that has the potential to grow your business in the long run, you might be able to secure an SBA 504 loan. As with the 7(a) loans, there are requirements such as operating in the U.S. and running a business that already turns a profit. Also, there is a cap on the size of your business if you want to pursue a 504 loan, with no more than an annual net income of $5 million allowed.
This is not one of the loan types to consider if you are looking for working capital or if you are dealing with a debt load that needs to be paid down. Rather, 504 loans are for assets like purchasing a new piece of land or buying new equipment that is expected to last for many years. You may also qualify if you are going to use the money for significant upgrades to existing commercial property.
Success in business is about more than having a good idea and finding the right market. Those are essential, of course, but you also need to have the funds available to bring your vision to life. Matching the right type of loan to the needs of your business will make it possible to accomplish great things that simply would not have happened without help from commercial lenders. Like Rattan Soni, who used a commercial loan to help her hotel business thrive.
If your business is in a position where funding could make all the difference, Biz2Credit would love to help. Get in touch with our team today to learn more.