What are Commercial Loans?
Commercial loans are no different than any type of loan you’d consider for your business. Normally, they’re debt financing agreements between a financial entity and a business.
They give you the funding you need to grow your business. And of course, you pay your commercial loan back in full over a period of time with interest. Are commercial loans what your business needs to grow? Keep reading for an overview of the best commercial lending options available—and how to apply to them all.
If you don’t have time to sort through all the different types commercial loans, here’s your quick list of the 6 commercial loans you absolutely need to know.
1. Traditional Term Loans
A general term loan, or a medium-term loan, is probably one of the commercial loan types you’re most comfortable with.
You borrow a set amount of money from a lender to grow your business, which you’ll pay back over time.
There’s various reasons why so many business owners want medium-term loans—they’re some of the most flexible and simple commercial lending options.
Thought term loans were just found at banks? Good news! These days, you can find great medium-term loans from online alternative lenders.
If your business is established, has good revenue, and your credit score is in tip-top shape, a medium-term loan might be a great commercial loan for your company.
While these loans take a good while to fund, they offer long terms and low interest rates that will almost always make the financing worth the wait (unless it’s a business emergency).
Medium-term loans work well for businesses that have a specific goal for their funding—whether that’s expansion, an advertising campaign, or a new product experiment.
Not only do they work for a specific one off loan, they also are the right kind of financing for major business investments—ones where you could use more than $100,000 in financing to get the job done.
2. Short-Term Loans
If a medium-term loan isn’t the kind of lending for you, a short-term loan might offer a better fit.
With terms ranging from 3 to 18 months, short-term loans are great small business loans if your company needs cash for a quick fix or an emergency.
However, be aware that fast cash comes at a price. Short-term loans tend to have the highest interest rates around (think 14% and up—way up).
Why are the interest rates so high? Well, short-term loans are expensive because they’re a pretty accessible commercial loan for small businesses.
It’s a trade off— businesses without much time in business or less-than-ideal credit ratings can get short-term loans, but lenders need to protect themselves against this risk by charging high rates.
Also, these loans are financed at a much faster rate than medium-term loans are.
Because these commercial lenders spend less time vetting the borrowers on their loan applications, they tend to work with riskier profiles.
Again, this correlates to higher interest rates for these commercial loans.
3. SBA Loans
While the Small Business Administration isn’t actually a lender, it can help small businesses find great commercial loans. The SBA is an arm of the government that helps incentivize lenders to loan to small businesses by guaranteeing a portion of those loans. This way, if you default on your SBA loan, the lender doesn’t lose that much money.
SBA loans are just like a commercial loan that you’d get from a bank—they have high maximum amounts, longer terms, and lower interest rates. But again, don’t expect to have the money in your bank the next day. Just like medium-term loans, SBA loans take a while to fund.
The SBA has 3 types of commercial lending programs: the 7(a) program, the CDC/504 program, and the Microloan program. Each of these commercial loans have their own distinct terms and uses.
4. Equipment Loans
If you’re searching for a small business loan because you need to buy an expensive piece of equipment, a great commercial loan to consider is—you guessed it—an equipment loan. If you’ve ever taken out a car loan, you already know the basics of equipment financing.
Why is equipment financing a great funding option for small businesses? The equipment itself acts as collateral for the loan, so you won’t have to put up any additional collateral.
Plus, with an equipment loan, you can make use of the equipment while you’re paying the commercial financing off—you’ll start to see some return on investment right away.
5. Business Line of Credit
If you’re looking for a commercial loan with a lot of flexibility, a business line of credit might be a great option for your small business.
Think of a business line of credit as a credit card: a lender gives you access to a pool of money that you can draw on whenever you need to. You only pay interest on the funds you take out. Once you repay the lender, your pool of money is refilled to its original amount, without having to reapply for the loan.
Because a business line of credit is revolving credit, it doesn’t cost you anything to wait to use the cash. You can withdraw and repay whenever you want to. A line of credit is one of the most flexible commercial lending options because you don’t have to worry about fixed repayment terms and schedules.
A business line of credit comes with some downsides, too.
These types of commercial loans tend to come with harsher late repayment penalties than a short-term loan would have. Plus, you run the risk of tying up your credit by making a lot of small withdrawals over time—preventing you from accessing that credit when you really need it.
6. Merchant Cash Advance
A merchant cash advance gives you a lump sum loan that you pay back by allowing the lender to cut into your daily credit card sales until the debt is paid in full.
As small business loans go, a merchant cash advance tends to be a fast and easy way to access capital for your business.
With a merchant cash advance, the lender takes a fixed percentage of your credit card sales—which can be both good and bad for your business.
Not making as many sales one week? The lender gets a smaller slice from your daily credit card sales. However, if you’re having a successful week, the lender takes a large cut from those sales, and you won’t see as much cash in the bank as you’d expect.