Commercial Loans: What Are They And How Do I Qualify To Get One?
What are commercial loans? Commercial loans are any type of loan made to a business instead of a person.
Commercial loans can provide an influx of capital businesses can utilize to propel growth and revenue.
With a commercial loan, you borrow capital from a financial institution, such as a bank, credit union or private lender.
Commercial loans are a type of credit used to support business activity. Examples include operating lines of credit and term loans for property, plant and/or equipment.
Commercial Loans vs. Business Loans
In general, commercial loans and business loans are the same thing: money that a company borrows from a lender to pay for its expenses. These terms are sometimes used interchangeably. However, that’s not always the case.
Within the financial industry, “commercial loan” tends to refer to products targeted at larger businesses. These loans are typically available in larger amounts and often require physical collateral. They may also have more in-depth applications and stricter qualification requirements.
A “business loan” or “small-business loan” on the other hand, refers to financing designed for smaller-sized companies. Compared to commercial loans, these products are usually available in smaller amounts and may have more flexible loan features.
How do Commercial Loans Work?
These types of loans are typically structured as business term loans, in which a lender provides you with a lump sum of capital that you repay over a specific period of time with interest.
With a commercial line of credit, you have access to a set amount of funds that you can draw from and use as needed. You only pay interest on the money you use, and once you’ve repaid what you’ve borrowed, the credit line resets.
Commercial loan amounts, repayment terms, interest rates and qualifications vary largely based on lender and loan type.
Types of Commercial Loans
There are also different types of commercial loans:
- Equipment Financing.These loans can help you purchase large or highly specialized equipment for your business.
- Commercial Real Estate Loans. Similar to mortgages, these loans can help you buy or renovate property.
- Commercial Auto Loans.These are used to buy vans, trucks or other vehicles for your business.
- Construction Loans. Finance new building projects or major renovations with these loans.
- Bridge Loans.This is a type of short-term financing typically used in commercial real estate to take advantage of an immediate opportunity and cover the gap until you can find a long-term option.
- Hard Money Loans.Hard money lenders focus heavily on the value of your collateral — usually commercial property or land — when underwriting applications, as opposed to more traditional loan requirements.
Alternatives To Commercial Business Loans
You may also want to consider these alternatives:
- Business Credit Cards. If your business hasn’t been around long enough to qualify for a commercial loan, business credit cards can help you spread purchases out over several payments. Still, their relatively low credit limits may make it challenging if you need to finance a substantial purchase. You might also consider a personal loan for your business, which will likely offer a higher limit than a credit card but might come with a higher interest rate.
- Short-Term Loans. If you need to manage your cash flow or cover daily expenses — as opposed to finance a large project — a short-term loan may be a better option for your business. These loans or lines of credit are usually available from online lenders and fund quickly. However, as a result, they often have higher interest rates.
