Running a business often requires funds, whether it’s to expand, buy equipment, or manage daily operations. One way businesses get these funds is through commercial bank loans. This article will explain everything you need to know about commercial bank loans in simple terms.
What is a Commercial Bank Loan?
A commercial bank loan is money that a bank lends to businesses. Many commercial loans require collateral, which means the business must provide something valuable, like property, as a guarantee. Businesses can use these loans for many reasons, like buying real estate, upgrading equipment, or covering their daily expenses. Some loans are secured, meaning the business provides something valuable, like property, as a guarantee. Others are unsecured, which means no collateral is needed, but they might have higher interest rates.
These loans are essential for businesses to grow or tackle financial challenges. They usually come with terms that include an interest rate, fees, and a repayment schedule.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
Related: How Can a Grant Help Your Business? Step by Step Guide
Types of Commercial Bank Loans
Commercial bank loans are not one-size-fits-all. Different businesses need different kinds of loans. Here are the main types:
Term Loans:
A term loan gives the business a lump sum of money all at once. You repay this amount with interest over a set period, like five or ten years. It’s useful for big expenses like buying machinery or starting a new project.
Line of Credit
A line of credit works like a credit card for your business. You borrow money as needed and pay it back. Lines of credit, also known as business lines, provide access to funds that can be drawn upon as needed. It’s flexible and great for covering short-term needs like inventory purchases or emergency expenses.
Commercial Mortgage Loans
These loans are for buying or refinancing commercial properties like office buildings or warehouses. These loans are specifically designed for acquiring commercial property, such as office buildings or warehouses. They usually have fixed interest rates and long repayment terms.
Construction Loans
If your business is building a new property or renovating an existing one, a construction loan can help. It provides funds specifically for construction costs.
Each loan type is designed for a specific need, so choosing the right one is important.
Related: 7 Best Business Financing Brokers for 2024
How Commercial Bank Loans Work
Getting a commercial loan is not as simple as walking into a bank and asking for money. Here’s how the process typically works:
- ApplicationThe business must submit a loan application, which involves filling out forms and providing documents like financial statements and a business plan.
- ReviewThe bank reviews the application to determine if the business is a good candidate. They look at things like the business’s income, debt, and overall financial health.
- Approval and TermsIf the loan is approved, the bank provides the money. The business agrees to repay it with interest over a certain period.
- RepaymentThe business makes regular payments (monthly or quarterly) until the loan is fully paid off.
Banks may charge additional fees, such as origination fees (for processing the loan) and closing costs.
Factors Affecting Interest Rates
Interest rates are the extra cost of borrowing money, and they depend on several factors:
- A high credit score shows the business is reliable in paying back loans, which can lead to lower interest rates.
- If the business owner has a strong credit history, it can positively impact the loan terms.
- Larger loans sometimes come with better interest rates because they represent more business for the bank.
- Shorter loan terms usually have lower interest rates than longer ones.
- The state of the economy and trends in the industry can influence interest rates.
Understanding these factors can help businesses prepare for better loan terms.
Qualifications and Application Process
To qualify for commercial loans, businesses usually need to meet certain requirements:
- Minimum Revenue: The business must earn a specific amount each year.
- Time in Business: Many banks prefer businesses that have been operating for at least a couple of years.
- Collateral: Some loans require collateral, like property or equipment, as a security.
The application process involves submitting:
- Financial statements
- Tax returns
- Business plans
- Proof of collateral (if required)
This process can take anywhere from a few weeks to several months, depending on the loan type and the bank’s requirements.
Collateral and Security
Banks often ask for collateral to secure the loan. Collateral can be:
- Real estate
- Vehicles
- Equipment
- Inventory
If the business cannot repay the loan, the bank can take the collateral to recover the money. Some loans also require a personal guarantee from the business owner, which means the owner is personally responsible if the business fails to repay.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
Small Business Administration (SBA) Financing Options
The Small Business Administration (SBA) offers a variety of financing options designed to help small businesses access the capital they need to grow and succeed. These programs come with favorable terms, such as lower down payments and longer repayment periods, making them an attractive option for many business owners.
One of the most popular SBA loan programs is the 7(a) loan program, which provides up to $5 million in financing for a wide range of business purposes. Whether you’re looking to expand your operations, modernize your facilities, or refinance existing debt, the 7(a) loan program can offer the flexibility and support you need.
For businesses looking to invest in major assets like commercial real estate or equipment, the 504 loan program is an excellent choice. This program offers long-term, fixed-rate financing, making it easier to manage large purchases and plan for the future.
If your business needs a smaller amount of capital, the Microloan program might be the right fit. This program provides small, short-term loans of up to $50,000, which can be used for working capital, inventory, supplies, and even certain not-for-profit childcare centers.
By exploring these SBA financing options, small businesses can find the right support to meet their unique needs and drive their growth.
Benefits of Working with a Commercial Bank
There are many advantages to choosing a commercial bank for your business loan:
- Wide Range of OptionsBanks offer many loan types, including lines of credit, making it easier to find one that fits your needs.
- Competitive Interest RatesBanks often provide lower interest rates compared to other lenders.
- Personalized ServiceBank loan officers can offer advice and guidance tailored to your business.
- Long-term RelationshipBuilding a relationship with a bank can make it easier to get future loans.
Tips for Choosing the Right Lender
Choosing the right lender for your commercial loan is a crucial step in securing the best financing for your business. Here are some key factors to consider to ensure you make an informed decision:
- Interest Rate: Start by comparing interest rates from different lenders. The interest rate can significantly impact the overall cost of your loan, so it’s essential to find the most competitive rate available. Remember that rates can vary based on the type of loan, loan term, and your business’s creditworthiness.
- Fees: In addition to the interest rate, pay attention to the fees associated with the loan. These can include origination fees, closing costs, and prepayment penalties. Understanding the full cost of the loan will help you avoid any surprises down the line.
- Repayment Terms: Consider the repayment terms offered by each lender. Look at the loan term, monthly payments, and any prepayment penalties. Flexible repayment terms can make it easier to manage your cash flow and meet your financial obligations.
- Collateral Requirements: Determine if the lender requires collateral to secure the loan and what type of collateral is acceptable. Knowing the collateral requirements upfront can help you prepare and ensure you have the necessary assets to secure the loan.
- Credit Approval: Check the lender’s credit approval process and requirements. Make sure you meet the necessary criteria before applying to avoid wasting time and effort on applications that are unlikely to be approved.
- Customer Service: Evaluate the lender’s customer service and support. A lender with excellent customer service can provide valuable guidance and assistance throughout the loan process, making the experience smoother and more positive.
- Reputation: Research the lender’s reputation by reading reviews from other customers. Working with a reputable and trustworthy lender can give you peace of mind and confidence in your financing decision.
By carefully considering these factors, you can choose the right lender for your commercial loan needs and secure the best possible terms for your business.
Tips for Getting the Best Loan Terms
- Don’t settle for the first offer. Compare rates and terms from multiple banks.
- Both personal and business credit scores matter. A higher score can get you better terms.
- Provide detailed financial statements and a strong business plan to increase your chances of approval.
- Some banks specialize in certain industries, which can make them a better fit for your needs.
Common Mistakes to Avoid
Here are some mistakes businesses should watch out for:
- Not Comparing Offers
Accepting the first loan offer without exploring other options can be costly. - Incomplete Documentation
Missing or incorrect information can delay the process or result in rejection. - Ignoring Loan Costs
Focus on the total cost of the loan, including fees, not just the interest rate. - Rushing Into Agreements
Always read and understand the loan terms before signing.
A commercial bank loan can be a powerful tool for businesses, providing the funds needed for growth and success. By understanding the different types of loans, how they work, and what factors affect the terms, businesses can make smarter financial decisions.
Working with a trusted bank ensures access to personalized service and a range of financing options. With proper preparation and a clear plan, businesses can secure the funding they need to achieve their goals while avoiding common pitfalls.
