What is a Commercial Loan and How Does It Work?

Learn everything there is to know about the commercial loan process.

What is a Commercial Loan?

A commercial loan is a type of loan used to finance business operations and investments.

Commercial loans can be used for a wide range of purposes, such as:

  • Financing working capital
  • Refinance existing debt
  • Equipment financing
  • Purchase real estate
  • Expanding a business
  • In some cases, even providing venture capital funding for startup businesses

The Federal Reserve reported that most businesses hoping to access financing needed it to cover rent or mortgage payments and wages.

Commercial loans are typically secured with collateral such as real estate, inventory, equipment, or accounts receivable.

Interest rates and repayment terms on commercial loans vary depending on creditworthiness, type of collateral offered for the loan, and other factors. Additional fees may also be associated with securing a commercial loan, such as origination fees or closing costs.

Some lenders offer fixed interest rates, while others provide variable rates with caps.

Commercial loans can be used for both existing businesses and start-ups. The amount available generally depends on the purpose of the loan—some lenders may provide working capital loans, while others offer larger lump sums intended for acquiring real estate or equipment. These can vary with commercial lenders, online lenders, or private lenders.

In 2017, the average business loan size financed by large national banks was $593,000, while foreign banks offered an average loan size of $8,512,000.

When done correctly and responsibly, taking out a commercial loan can provide numerous benefits to businesses, such as increased cash flow and access to capital.

How Commercial Loans Work

When applying for a commercial loan, the borrower must meet stringent requirements.

You will be required to submit personal and business financial information to the lender to be approved.

Banks and other lenders will consider the following when deciding if an applicant meets eligibility to receive a loan:

  • Credit score and credit history
  • Proof of assets and liabilities
  • Tax returns from previous years
  • Financial statements
  • Current financial standing (such as cash flow and profitability)
  • Collateral offered in exchange for the loan amount requested
  • Any additional information required by the lender

In addition to these basic requirements, many lenders may also require an application fee which typically covers processing costs associated with approving the loan. Depending on the loan size requested, these fees can range from hundreds to thousands of dollars.

Once the borrower has submitted all the requirements, the lender assesses the loan’s riskiness before deciding whether or not to approve it.

If approved for the loan, the borrower will likely receive the funds within a few weeks or months, depending on the size of the loan and other factors.

Blooma’s AI platform helps reduce loan origination time and cost, perform a more comprehensive deal analysis, and increase opportunities to close more deals.

Types of Commercial Loans

Various types of commercial loans are available, including working capital loans, real estate loans, and accounts receivable financing.

Each type of financing offers different amortization, term loans, and loan rates depending on the specific needs of a business.

Working Capital Loans 

These commercial loans provide businesses with the financial flexibility to cover short-term expenses. Working capital loans are typically used when a company needs quick access to capital due to cash flow problems, unanticipated expenses, or need to cover the following:

  • Purchase of inventory
  • Covering payroll expenses
  • Making more significant purchases, such as new equipment or technology upgrades

Working capital loans can range from a few hundred to several thousand dollars, depending on the size of the business and their specific requirements.

These loans can be structured in various ways, so a business needs to understand its repayment terms before accepting any loan agreement.

Generally, these loan agreements involve a fixed interest rate, a set repayment timeline, and specific criteria for approval. Lenders also often require collateral to secure the working capital loan.

The Small Business Administration (SBA) provides an array of loans to assist small business owners seeking working capital financing options. These include small business loans and short-term loan programs such as the following:

  • SBA 7(a): A selection of SBA loans to guarantee portions of the total amount, cap interest rates, and minimize fees
  • SBA 504: Long-term financing with a fixed rate to buy, restore or update real estate, machines, tools, and other assets.
  • Microloans: SBA’s smallest loan program is designed to help entrepreneurs and small businesses get a head start by providing up to $50,000 in funding.

The SBA website also provides free business counseling that advises how to approach traditional banking institutions when seeking financing. This helps entrepreneurs to make informed decisions about finding the right solution that works best for their business needs.

Real Estate Loans

Commercial real estate loans typically involve applying for business financing from a lender to purchase commercial property or finance-related projects. 

The loan amount is typically secured by the collateral of the financed property, making it an attractive option for those with less-than-perfect personal credit scores.

Common types of real estate loans include:

  • Conventional mortgages: Any homebuyer’s loan not offered by a government agency
  • Commercial mortgage loans: Provide financing options for business owners on commercial, instead of residential, properties
  • Jumbo loans or mortgages: Offer higher loan amounts than conventional mortgages (and exceeds the limit set by FHA) to finance luxury properties.
  • Adjustable-rate mortgages (ARMs): Offer initial fixed rates for a certain period then variable rates for the remainder of the loan which adjust periodically—either monthly or annually.
  • FHA loans: Backed by the Federal Housing Administration and provides buyers with low down payments and closing costs, plus flexible credit requirements.
  • VA home loans: Guaranteed by the U.S. Department of Veterans Affairs (VA), these loans allow those who have served in the military or have VA benefits to purchase properties with lenient down payment and credit score requirements.
  • Home equity loans/lines of credit (HEL/HELOC): Offer those looking to make repairs, renovations, or upgrades to their current home the flexibility they need through revolving lines of credit based on the borrower’s home equity value and credit profile. These have better interest terms than credit cards or personal loans, as it uses the borrower’s house as collateral. These can be personal or business lines of credit.
  • Bridge loans: Homebuyers looking to purchase a new home without selling their current one may benefit from bridge loans. These loans allow them to borrow against the value of their current house to cover the down payment on another property while waiting to sell.
  • Hard money loans: offer terms primarily based on the property used as collateral and not on the borrower’s creditworthiness. These loans are typically funded by private investors or entities (not traditional financial institutions like banks) that recognize a potential benefit from risky ventures. 

Borrowers should also consider closing costs when considering a real estate loan, such as appraisals, title insurance, attorney fees, survey fees, and deed recording fees.

Additionally, some lenders may require borrowers to put down at least 20% of the purchase price as part of their down payment or pay mortgage insurance premiums if they don’t meet this requirement. 

Accounts Receivable Financing

Accounts receivable financing will enable companies to receive the cash they need without waiting for customers to pay their bills. It also offers businesses more flexibility and control over managing their cash flow.

Typically, these loans offer a flexible repayment schedule, i.e., monthly payments and a quick application process with no credit check or significant collateral requirements.

Accounts receivable financing is considered relatively low risk since it’s based on the quality of the customers’ invoices rather than a good credit score or extensive financial records.

It allows companies to use their outstanding invoices as collateral to receive working capital from a lender. Some may even consider same-day payouts for certain transactions.

This gives small businesses access to funds much faster than traditional forms of borrowing. 

Let Blooma Help Speed Up Your Commercial Loan Process

Tired of slow loan processing and tedious manual data collection? Blooma is here to help!

Blooma is revolutionizing the loan process and making it easier for business owners to secure a loan. By automating 80% of underwriting, Blooma helps lenders make more informed decisions in minutes rather than days or weeks.

Combining data from multiple third-party sources with continuous monitoring of your portfolio, you can be sure investments are protected while getting more leads accepted faster.

Our platform helps lenders accelerate their transactions by automatically analyzing asset and borrower information. We even streamline post-origination measures with our real-time monitoring feature, eliminating long annual auditing processes.

Ultimately, this allows businesses to secure funding much faster while increasing lender efficiency as they can analyze more leads in less time than ever.

Explore what Blooma can do for you. Request a demo today.

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