Understanding the 10 Basic Commercial Loan Types
October 25, 2021 | Last Updated on: July 25, 2022
October 25, 2021 | Last Updated on: July 25, 2022
You have to spend money to make money. Savvy small business owners know the truth of this statement. And with the economy rapidly picking up again after 2020, that saying couldnâ€™t be more relevant. Right now, many small businesses and startups are looking to take advantage of low interest rates for commercial financing to expand.
But saying that you need a small business loan and knowing where to start are two very different things. And many business owners donâ€™t know what loans are available or which one they should apply for.
In this article, weâ€™re going to talk about the different types of basic commercial business loans that are available. Weâ€™re also going to talk about the benefits of using an alternative business loan source so that you will feel more prepared when it comes to starting your business financing.
For business owners with a bootstrap mentality, the thought of taking out a loan may create apprehension. But if you are looking to start or expand a business, a low-interest-rate loan can sometimes be the difference between rapid growth and failure. Most startups require significant working capital to launch in a meaningful way. And unless you have that money already saved up and are willing to invest it in yourself, your options are either to seek investors or take out a loan. There are upsides and downsides to both options. In short, investors will typically seek to have input into your business decisions and may be harder to attract if your business is small, but their network and advice will be valuable and they share the risk should your business run into problems. On the other hand, a loan keeps you in control of your company (as long as you don’t default), and can have great interest rates, but doesn’t come with any of the networking or insights that an investor brings. Plus, you bear the full risk if things go south.
If you’re the owner of an established business that wants to expand or add new inventory, the situation is similar. You may be able to attract investors, but they will want to influence your business decisions based on their own experience. A commercial business loan may allow you to maintain more independence (although you will still have to present your business plan to the financial institution when you submit your loan application).
Several types of commercial business loans are available, we’ll unpack each in turn below.
Equipment loans are explicitly used to finance equipment and machinery essential for running your business. You can finance office furniture, farm equipment, commercial ovens, medical equipment, and more with this loan.
With this type of loan, the loan amount you will receive will entirely depend on the value of the equipment or machinery youâ€™re financing. If youâ€™re looking to purchase $50,000 worth of equipment, that will be the maximum loan amount you will receive. You will also use the equipment or machinery as collateral against the loan. That way, if you end up defaulting, the lender will be able to make their money back by collecting the item the loan covered.
The loan term for equipment financing should be determined based on how long you expect to use the equipment. For instance: letâ€™s say you need to purchase a commercial oven that you estimate youâ€™ll use for ten years. In this case, youâ€™ll want a ten-year term loan at most so that you aren’t making monthly payments after the equipment is no longer in use.
To purchase commercial property, many organizations require the use of outside financing. Imagine you wanted to buy a new location for your growing business or build onto the site you currently have; a commercial real estate loan would provide the capital you need.
When seeking out a commercial real estate loan, lenders will usually look at three things to calculate your creditworthiness: your business finances, personal finances, and the characteristics of the property youâ€™re looking to purchase or expand. Lenders consider small businesses a risk, so they want to ensure that your business cash flow will be enough to cover this type of loan payment. Your business credit score will be taken into consideration, as well.
Inventory loans are available for the sole purpose of purchasing inventory. Theyâ€™re flexible in terms of what type of inventory you can buy, however. It can be inventory the business will sell for retail value, or that will be used to provide services and increase production in a hospitality setting. For instance, restaurant owners can purchase ingredients, cleaning supplies, office supplies, plates, silverware, or anything else that might make running the restaurant easier and will help provide better hospitality services.
SBA loans, like the SBA 504 loan and the SBA 7, are loans backed by the Small Business Administration, though they arenâ€™t granted from the agency itself. The SBA works directly with small businesses and lenders to help them find the proper financing for their organization. It sets specific guidelines for its partnering lenders, community development organizations, and micro-lending institutions.
SBA loans are designed to open up more opportunities for small businesses that may initially struggle to find a lender for their organization. They do this by reducing the risk to lenders (because the SBA backs the loan). As a result, you may be more likely to be approved for an SBA loan.
Additional benefits include access to expert advice, competitive terms, counseling, education, lower down payments, flexible overhead requirements, and the fact that some SBA loans donâ€™t require collateral.
Term financing provides basic, flexible loans to small businesses with strong financial statements. You can use the funding to hire new employees, purchase company vehicles, change branding, expand your inventory, purchase equipment and machinery, improve employee training, and much more. This type of loan is given in one lump sum that youâ€™re required to pay back with interest over a certain period. The loan rates can be either fixed or floating.
A business line of credit is a flexible loan that works similarly to a credit card. Let’s say your balance sheet qualifies you for a line of credit of $100,000. You would then be able to access up to that much cash, but would only be expected to start making payments on the portion you use. Many organizations choose this route when calculating options for unexpected costs.
With a business line of credit, you can draw funds as you need and repay them over time. But you can do this as often as you need. The loan never officially runs out so long as you make your payments on time and donâ€™t exceed the loan limit. As such, it differs from a term loan, and typically the loan amounts are smaller.
Bridge loans provide immediate cash flow, but the interest rates are typically higher than other loan types. Itâ€™s a short-term loan (up to one year) used until an organization finds permanent financing. They are generally backed by collateral and are typically used in real estate, such as when an organization wishes to change locations, but their current location hasnâ€™t sold yet. Once the current or former piece of property sells, the payment from the sale will go toward the bridge loan and the new property.
Commercial auto loans are exactly what they sound like; loans made to purchase or refinance company vehicles. While you can use term loans or a business line of credit to buy a company vehicle, one of the benefits of directly applying for a commercial auto loan is that it comes with built-in collateral. Similar to financing a personal car, the company vehicle is considered collateral. By having the built-in collateral, you will find that commercial auto loans may cost less and be easier to qualify for than other traditional loans.
Commercial construction loans are short-term loans that are granted with the sole purpose of building a new business location or expanding an old one. If a business owns the property, any equity already put into the property can be used as a down payment toward the loan. This is the type of loan you will want to consider if your company is looking into doing any construction that is directly related to the business.
Hard money business loans are financial solutions to organizations that donâ€™t qualify for a traditional commercial loan. This opens the door for companies that have a poor credit history or too little time in business. Your businessâ€™s real estate typically backs these types of loans, and it heavily relies on collateral. Since this is an asset-based loan, you will need to have a lot of collateral to put on the table to qualify for a hard money loan.
When looking for a commercial lender, you might ask yourself where you should look for the one that best fits you. There are two different avenues of business lending that you can look into: traditional commercial lenders and alternative commercial lenders.
Traditional commercial lenders are those lenders that offer term loans, including various banks, credit unions, and SBA lenders. Theyâ€™re often the first lenders that a business owner might reach out to when trying to secure a loan, as they are the most well-known sources.
If you feel intimidated by traditional business loans, or you don’t have a relationship with a business bank, another option is to look into alternative commercial lenders like Biz2Credit. These lenders try to take the guesswork out of applying for a commercial loan. While youâ€™ll need the same information about your company as you use for applying for a traditional loan, alternative lenders provide a more straightforward application process, faster decision turnaround time, quicker fund disbursement, and have a wide range of loans available. You can apply for a small loan or a large loan, and still take advantage of lower interest rates, depending on your business needs.
Deciding on the type of business loan you need for your company doesnâ€™t have to be intimidating. There are loans available for every type of business need, each with its own set of pros and cons. Traditional lenders are an excellent source for gathering information to help you decide which type of loan you need, but sometimes they arenâ€™t the best route. Thatâ€™s where alternative commercial lenders such as Biz2Credit come in. They strive to make the application process more accessible and less time-consuming and provide businesses that may not qualify for traditional loans an alternative option.
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