A commercial loan can help your business grow and overcome financial hurdles. However, it’s important to understand the rates, repayment terms and requirements of commercial lending before applying.
Many lenders have strict standards that may require documentation such as income tax returns and bank statements for you and your business. This can make it difficult for small businesses to secure financing.
1. What is a Commercial Loan?
A commercial loan is money you borrow from a lender that you pay back over time. You can use the financing to cover large expenses or expand your business. These loans are typically for medium-sized companies, those with $10 million in revenue or more. There are different types of commercial loans, including working capital, real estate and asset-based lending. Some lenders quote the cost of financing in terms of a factor rate instead of an interest rate.
Most traditional lenders require extensive documentation and a high credit score. Online lenders offer alternative commercial loans with less rigorous requirements and are often easier to qualify for. You can use a business loan calculator to determine how much financing you need. You must also be prepared to explain why your company needs the funds.
2. How Much Can I Get?
The cost of a commercial loan will depend on the type of financing and its interest rate. It can also be impacted by the company’s financial standing, including its revenue and profitability.
Many lenders have minimum credit scores that borrowers must meet to qualify for certain types of loans. This is especially true of traditional banks and lenders that work with the Small Business Administration.
Startups and new businesses may find it harder to meet the requirements of these types of loans, although business credit cards and personal business loans are options for them to consider. The best way to gauge the eligibility of a lender is by reviewing their website and reading through their lending criteria. This self-assessment can help you prepare for the application process and improve your chances of getting approved.
3. What Are the Eligibility Requirements?
The qualifications for a commercial loan depend on the purpose of the financing, as well as the lender and type of business. However, the standard requirements typically include the following:
Business structure (corporations, partnerships or LLCs)
Personal credit score and history (for entrepreneurs who are guarantors)
Annual revenue
Time in business
A well-structured business plan that showcases the company’s strategy, market analysis and financial projections can increase your chances of being approved for a commercial loan. Lenders may also consider the company’s assets and its ability to pay back the debt in a timely manner.
Lenders are often risk-averse when it comes to issuing commercial loans. That’s why they have more stringent criteria than consumer loans, including minimum credit scores, down payments and income requirements.
4. How Do I Apply for a Commercial Loan?
Choosing the right lender for your business is a crucial decision that can influence both the speed at which you get funding and your long-term financial health. Whether you opt for a traditional bank, online lender or credit union, or SBA-backed financing, you should make sure you understand their requirements and how they differ from those of other lenders.
The first step is determining why your business needs the funds. This will help you focus your efforts on loan opportunities that are a good fit and save you time applying for loans that don’t meet your needs.
You should also compare loan terms, interest rates, fees and eligibility requirements to ensure you’re getting the best deal. If necessary, consider having a small-business financial advisor or attorney review the loan agreement before you sign.
5. What Are the Frequently Asked Questions?
Venturing into the world of commercial financing can be both exciting and daunting for business owners. Proper preparation, knowledge, and appropriate strategy can help you navigate the process more efficiently.
Start by assessing your borrowing needs and researching available lenders to find the best fit. It’s also important to understand how the loan terms — interest rates, payback periods and collateral requirements — will affect your company’s financial health.
Be sure to thoroughly prepare all documentation, including business bank statements, tax returns and a business plan, as these are often required by lenders. Having the right information can speed up the process and prevent rejection due to missing or inaccurate documents. Finally, be sure to carefully consider your creditworthiness and perform a debt service coverage ratio (DSCR) analysis to ensure that you can comfortably make the loan repayments.