Commercial Business Loans
Commercial business loans are often used by smaller businesses who cannot yet offer debt or equity to investors but still need to raise capital. They can many forms, but at their core they are meant to help a business achieve success.
If the time has arrived for your business to borrow, you will want to learn about your options. Interest rates and terms vary widely between types of capital and lenders, but Shield Funding can help you secure commercial business loans for your business with very little effort. The entire process can be done online and funding can be available as fast as the same day you apply. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are Commercial Business Loans
At its simplest, a commercial loan is one extended for business, rather than a personal loan secured with your personal banking profile. The purpose of borrowing is to support a business’ growth, operations, or capital investments. They can take the form of mortgages, SBA loans, bridge loans, and more.
A commercial business loan will have the following characteristics:
- Often require collateral, including property for a commercial mortgage.
- Can be renewable after a short time period.
- Longer repayment periods and preferably no prepayment penalties.
- No personal capital or personal guarantees required as collateral.
Specific types of commercial business loans will have different qualities which may make them a better choice for your business.
Can I Get a Commercial Business Loan From a Bank
Banks do offer commercial business loans, most frequently in the form of commercial real estate loans and equipment financing. Banks prefer to lend if the loan is secured by collateral, which reduces their risk. The property or equipment for which you obtained the mortgage or equipment financing secures the loan, so the bank accepts less credit-worthy borrowers and charges lower interest rates.
While commercial business loans through a traditional lender often have the lowest rates, it is not easy to qualify for them. Typically, you need to meet the following to qualify for a bank’s commercial loans;
- A credit score above 620.
- Been in business for longer than two years.
- Strong monthly and annual cash flows.
- Annual revenues above $100,000.
- Property or equipment must appraise at the needed value.
The minimum qualifications will be slightly different between lenders and depending on the type of funding you seek. The underwriter could also request more documentation during the loan approval process. Banks commonly ask you to give them a five-year business plan which includes detailed information on how you plan on using the loan’s funds, a few years of tax returns, bank statements, and financial statements.
Banks do not move quickly when approving commercial loans, and it could take months to receive the funds your business needs. Even if you could qualify for their loans, look at the bigger picture and whether or not you can wait months to get business funding when deciding where to borrow. Alternative lenders also offer commercial business loans at competitive rates, but also have a much easier application processes and shorter approval times.
Types of Commercial Business Loans
Commercial business loans can also be called small business loans, and that umbrella encompasses business lines of credit, commercial mortgages, and more.
Commercial Business Loans with an Alternative Lender
Alternative lenders are not traditional banks, with branches and large support staff to maintain. They have lower overhead costs, which frees up working capital for them to lend to business owners who might not meet all of a bank’s qualifications, or who simply prefer the ease of borrowing with an alternative lender.
Compared to the long application and approval process for a commercial bank loan, an alternative lender can evaluate your loan application and approve a commercial business loan in as little as 24 hours to a few days, and they even offer business loans with bad credit. Capital could be disbursed within 24-48 hours.
While alternative lenders often work with borrowers who have bad credit, if you have good to excellent credit their rates can compete with traditional loan options. Even business owners with credit scores as low as 500 can qualify for a commercial business loan with an alternative lender, as long as their businesses generate a minimum of $8,000 in monthly revenues. Underwriters base their approval on annual revenues and length of time in business.
Alternative lenders provide funding for anywhere between $5,000 to $1 million, but they can charge higher interest rates than a bank to cover their risk. Commercial business loan interest rates from an alternative lender range from 12% to 45%.
Alternative lenders aim to make lending and borrowing easy. If your business has an unusual cash flow pattern, they will work with you on a repayment schedule of monthly, bi-weekly, weekly, or even daily payments. Set up automatic payments for peace of mind and focus your attention on growing your business, instead.
Commercial Lines of Credit
A commercial or business line of credit is a revolving line that provides access to capital whenever you need it. There is an upper limit to your borrowing ability, like a credit card, and after a few years the amount outstanding on the line of credit freezes and converts to a term loan.
Business lines of credit are excellent if you know that you will need funds but are not quite sure of when or how much. The capital stands ready, and if you never draw on the line, you will never owe a payment. You could be charged an annual fee just to have it open, however, or withdrawal fees when you take out funds.
Lines of credit most commonly charge variable interest rates of Prime plus a percentage. The rates will be higher than a term loan because there is less underwriting involved but are usually less than a credit card. If you want to learn more, talk to Shield Funding about business lines of credit.
Commercial Credit Cards
Commercial, or business, credit cards are easier to obtain than a fixed-rate, term loan. You can apply through an online application and receive an answer in minutes. But, because a credit card is a form of unsecured borrowing, your credit limit could be lower than the amount of funds you need.
A business credit card works best at managing cash flow ups and downs rather than for meeting the purposes of large capital investments or growth initiatives. They help you pay a vendor if a bill comes due before your customers have paid. Plus, they are a renewable form of capital. Once you have paid off a balance, you can use the credit again.
Credit cards charge high interest rates when compared to other forms of commercial business loans. Rates start around 14.49% and can reach as high as 26.99%. If you have poorer credit, you will pay a higher interest rate. That rate could easily be higher than the rate an alternative lender would give you on a bad credit line of credit.
Interest rates charged on credit cards are based on Prime, and your rate could fluctuate if the Federal Reserve raises the Fed Funds Rate. You could also incur late fees, and some companies will raise your rate if you miss a payment. Business credit cards often charge annual fees, too, and the company could raise that fee every year.
SBA Commercial Loans
The Small Business Administration or SBA offers loans to small businesses to help encourage economic development in our country. The government does not lend directly, instead, they work with traditional lenders who have been approved through the program. The SBA guarantees a portion of the loan, much like a co-signer.
SBA loans come with excellent interest rates and terms, and if you have slightly lower credit the lender might still approve your application due to the government guarantee. However, SBA loans have stringent criteria for qualification, and thus are often not an option for many small business owners. Excellent credit is a must, as is a strong business history and revenues.
Applications for SBA loans must be completed for both the bank and the SBA office. Documents required could include business and personal tax returns, financial statements, a business plan, one year’s projected cash flow, and bank statements. Note that often the lender requires a down payment of 10% to 25% of the loan’s total amount.
The process of applying and being approved for an SBA loan is not a quick one. It takes time to collect all the required materials for your application, and you might need to involve your CPA. If that is the case, you may incur professional fees as a cost during the loan application process before you even know if you will receive funding.
Commercial Equipment Financing Loans
Equipment financing loans are a common form of commercial loan. The loan finances the purchase of large pieces of equipment. While a lender will check your credit it is less important than when obtaining capital through an unsecured loan such as a credit card.
The equipment serves as collateral to the equipment financing loan. If you are buying a new bakery oven, the bank would be able to seize the oven as payment if you defaulted on the loan. If you have poorer credit, the bank might ask you to put a down payment on the equipment to mitigate their risk, but your credit will not automatically disqualify you from a loan.
Some equipment lenders finance up to 125% of the equipment’s value to cover soft costs like shipping and delivery. Traditional lenders rarely require less than two years of business history and have minimum annual revenue requirements. If you are purchasing high-value equipment, you could be asked to provide the same amount of documentation as a term loan.
Lenders will ask about the equipment’s age, condition, and value. They may accept your appraisal, or that of the seller, or could send out their own appraiser to confirm its value.
These are short-term loans, with terms of 2-3 years that align with the equipment’s useful life or depreciation schedule. Many equipment financing lenders grant you a 90-day grace period before you have to make your first payment, which saves you money and allows you to start generating revenues with that new equipment.
Commercial Real Estate Mortgages
If you are seeking to purchase a new building, consider taking out a commercial real estate mortgage. These mortgages have longer terms and lower interest rates than some of your other options, but many lenders require a minimum loan amount of $100,000. Traditional lenders insist that you have been in business for two years and have annual revenues of $250,000
The property that you are interested in buying must also meet loan-to-value ratios as specified by the lender. If a lender requires a 75% LTV ratio on the mortgage, you will have to put down the remaining 25% on the property.
The term on a commercial mortgage could be between seven to thirty years, similar to a private mortgage. Rates will be higher than mortgages for home owners, however, as there is more risk in commercial lending. Individuals are less likely to default on their primary residence than they are on a building for commercial use.
How to Find the Best Commercial Business Loan
The first step is to get clear on why you need the loan’s funds. This will help you decide on the type of funding that best suits your business. If you are buying new equipment, an equipment financing loan will likely be your best option. Purchasing inventory from a competitor that is going out of business and need to move quickly? Look into a commercial business loan from an alternative lender.
Knowing why you need the capital also helps you land on the amount you need to borrow. Having a sum in mind will further direct you towards the best form of loan. Keep in mind your business’ goals when investigating your options.
Once you have a few lenders on your list, start asking questions. Ask if the interest rate they charge is fixed or variable, ask about any fees, and ask if they will charge you a prepayment penalty if you repay the loan early. All of these can affect the loan’s overall cost to you.
The simple interest rate that you will see on a lender’s website does not reflect fees and other costs of borrowing. Ask the lender if they can give you the loan’s APR, or annual percentage rate, which blends together both the interest and fees. It’s a more accurate representation of your true cost of capital.
Lastly, look for a reputable lender. If they have been in business for a long time, such as ten years, it tells you that they know how to responsibly lend and how to serve their customer’s capital needs. Read online reviews and ask others in your industry for advice and recommendations.
There is more to finding the best commercial business loan for your business than just looking at the amount you can borrow. Take your time to research and compare options so that your borrowing experience will be successful.
The Final Word on Commercial Business Loans
Commercial business loans can start at $5,000 and go up to the millions, but no matter the loan’s size you want to borrow responsibly and successfully. Consider consulting with an accountant or financial advisor before submitting a loan application, and listen to their advice.
An experienced lender will analyze your business and its need and help you decide between products. Call Shield Funding today and talk to one of our representatives to learn more about our commercial business loans.