Commercial Business Loans Tailored to Your Needs

Starting a new business can be challenging in many ways, especially financially. Find the best business loans that fit your financial needs.

Most small business owners believe it is possible to run a thriving company. With this vision, it's clear that while determination drives your journey, the proper financial support is often the key ingredient that truly makes the difference.

These small business commercial loans are more than just funds; they're the stepping stones to new opportunities, helping to bring your business ideas to life. Whether you're starting up, expanding, or just needing a financial lift, let's explore the world of commercial business loans and discover the option that aligns with your business's unique journey.

How Do Commercial Business Loans Work?

Generally, commercial business loans are used to finance large and small capital expenditures and operational costs that a company may otherwise be unable to afford. Commercial loans vary widely in terms of amount, interest rate, and terms of repayment.

Loan amounts can vary quite a bit. A business may borrow anywhere from $5,000 to $5 million, depending on the lender’s policies, the business’s needs, creditworthiness, and financial history.

Commercial business loan interest rates also vary but generally range from 3% to 12%. The loan terms can range from a few months to several years.

Lenders may require a down payment for a specific type of commercial business loan. This is often the case when requesting a large loan amount or financing high-value assets like equipment or real estate. Usually, the down payment ranges from around 10% to 30% of the total loan amount.

Commercial Loans for Small Business Owners

There is one challenge that is common to all small businesses – securing funding. In fact, a lack of cash is the top reason for business failure.

But not every small business will run out of funding. Several commercial loan products are designed to meet the unique financing needs of small businesses and startups. Here are some of the top commercial business loans:

Accounts Receivable Financing

Accounts receivable financing is a commercial funding option that advances a business’s unpaid invoices. Instead of waiting for customers to clear their debts, businesses can quickly convert outstanding invoices into cash by selling them to a factoring company.

This immediate liquidity provides companies with the capital needed for various operational expenses without the delay of payment terms.

Here’s how accounts receivable financing works:

1. Your business provides goods or services to customers and issues invoices.
2. You sell the outstanding invoices to a factoring company at a discounted rate.
3. The factoring company furnishes an immediate cash advance to you, usually comprising 80% to 95% of the invoice value.
4. Customers settle their invoices by paying directly to the factoring company.
5. The factoring company takes a fee, generally a certain percentage of the invoice total. While the fee can vary, it typically ranges from 1% to 5% of the invoice total.
6. Once the payment is secured and factoring fees are deducted, the factoring company disburses the remaining balance to the company.

Accounts receivable financing offers the following benefits to businesses:

• Improved Cash Flow: Businesses can get immediate access to working capital instead of waiting for customers to pay invoices, helping them to meet operational expenses, manage working capital, invest in growth opportunities, or manage seasonal fluctuations.
• Credit Risk Management: The factoring company typically handles credit checks and collections, reducing the business’s exposure to bad debts.
• Time and Resources Savings: Businesses can save time and resources as the factoring company takes on the responsibility of invoice collection, allowing them to focus on their core operations.
• No Additional Debt: Accounts receivable financing is not a loan, so businesses do not incur additional debt on their balance sheets. This can be beneficial for their credit rating and financial ratios.

Small Business Acquisition Loan

Establishing a business from the ground up is undoubtedly a fulfilling accomplishment for many budding entrepreneurs. However, some business-savvy individuals may prefer to acquire an existing business.

For these instances, business acquisition loans can come in handy. Small business acquisition loans are designed to purchase an established business or franchise. These loans offer entrepreneurs the financial backing they need to acquire a business without the necessity to drain personal savings or assets.

Generally, small business acquisition loans can range from $30,000 to over $5 million with interest rates around 5% to 10% and terms between 10 to 25 years.

Here’s what the funds can be used for:

• Purchasing the Business: The most direct use of the funds is to cover the cost of purchasing the business, ensuring you don’t have to exhaust your finances for the acquisition.
• Working Capital: Acquisition loans can also provide the necessary working capital to keep the business operational as you transition into ownership. This capital can cover payroll, rent, utilities, inventory replenishment, and other operational expenses.
• Renovation or Remodeling: If the acquired property requires immediate improvements or changes, the loan funds can be allocated for renovation or remodeling.
• Equipment Purchase: In some cases, the purchased business may need new or upgraded equipment. The funds from the acquisition loan can be used to make these purchases.

Here are some reasons franchisees and small business owners prefer this financing option:

• Structured Repayment Plans: Small business acquisition loans usually come with fixed monthly payments and clear repayment terms, helping borrowers manage their finances and budget effectively.
• Potentially Competitive Interest Rates: Certain types of acquisition loans, especially those backed by the Small Business Administration (SBA), may offer competitive interest rates, making the cost of borrowing more affordable for small business owners.
• Long Repayment Terms: The repayment terms for small business acquisition loans are typically longer compared to other types of financing, often ranging from 10 to 25 years.
• Build Credit: Timely repayment of a small business acquisition loan can help business owners build or improve their business credit score, potentially making it easier and more affordable to secure financing in the future.
• Tax Benefits: Interest paid on small business acquisition loans is typically tax-deductible, providing potential tax benefits for business owners.

Microloan

For smaller-sum business expenses, microloans can be a viable option for entrepreneurs. Microloans tend to offer smaller amounts of capital, generally ranging from $500 to $50,000.

Some microlenders may offer loans up to $100,000, but these are exceptions rather than the rule. The majority of small business owners need less than $100,000 to start their company. Loan terms generally extend up to a maximum of six years, with interest rates ranging from 5% to 18%.

Microloans can be used to cover small business expenses, such as:

• Inventory Purchases: Microloans can be used to buy inventory. This is especially beneficial for retail businesses that need to stock up on products to meet customer demand.
• Working Capital: Microloans can provide working capital for businesses to cover daily operational costs such as rent, utilities, and payroll, ensuring seamless business operations.
• Marketing and Advertising: Businesses can allocate microloan funds for marketing and advertising initiatives, helping to increase their visibility and attract more customers.
• Business Expansion: Microloans can support business expansion, aiding in the funding of new projects, product lines, or services that contribute to business growth.

Here are some noteworthy pros of microloans that stand out for small businesses and startups:

• Accessibility: Microloans are often more accessible to small businesses and startups than traditional bank loans due to more lenient eligibility requirements.
• Fast Funding: Microloans are often processed more quickly than traditional loans, providing faster access to capital for urgent business needs.
• Smaller Loan Amounts: The smaller loan amounts are ideal for businesses that need a modest amount of capital for startup costs, inventory, or other expenses without the burden of a large debt.
• Shorter Loan Terms: Microloans generally have shorter loan terms, allowing businesses to pay off the loan more quickly and minimize long-term interest costs.
• Non-Profit Lenders: Many microloans are offered by non-profit organizations that also provide valuable resources, training, and support to help small businesses succeed.

Short-Term Business Loan

Short-term business loans are small-sum financing options that are designed to be repaid within a year. These loans offer a quick and flexible financing option for business owners in need of immediate capital. They are often tailored to meet urgent financial requirements to help businesses navigate unexpected challenges, seize growth opportunities, and ensure smooth operational flow.

Short-term business loans can range vastly in amount but are typically within the range of $5,000 to $250,000. Interest rates also vary, starting as low as 8% and reaching up to the high double digits. Short-term business loans are usually repaid within one year; however, some lenders may offer terms of up to 18 months.

In addition to quick funding, short-term loans also offer businesses the following benefits:

• Easier Approval: Lenders might have less stringent qualification criteria for short-term loans, making it easier for businesses with lower credit scores or limited credit history to obtain financing.
• Flexible Usage: Funds from short-term loans can be used for various operational needs, including inventory replenishment, payroll, or emergency repairs.
• Suitable for Temporary Cash Flow Issues: Short-term loans can effectively address temporary cash flow problems, helping businesses maintain smooth operations without the burden of long-term debt.
• Limited Collateral Requirements: Some short-term loans may require limited or no collateral, making it more accessible for businesses that may not have significant assets to pledge.

Startup Loans

Embarking on a new business venture is exhilarating, but it often comes with substantial financial demands. For budding entrepreneurs, startup loans can be a beacon of support. This specialized form of financing is crafted explicitly for businesses in their infancy, offering the monetary boost needed to set the foundational blocks.

Startup loans can be used for various expenses, including purchasing equipment, leasing a commercial space, buying inventory, marketing, and hiring staff. Typically, startup loan amounts range from $500 to $750,000, depending on the business plan, credit score, and the lender's terms.

Interest rates also vary widely, usually ranging from 6% to 20%, influenced by the loan amount, term, and the borrower's credit profile. Generally, the term for a startup loan can extend from one to five years, offering ample time for businesses to find their footing and commence repayments.

Benefits unique to startup loans include the following:

• Credit Establishment: On-time loan repayment can enhance your business credit profile, paving the way for easier access to additional funding in the future.
• Limited Collateral: Some startup loans do not require extensive collateral, making it easier for new businesses to secure the funding they need.
• Financing Options: Startup loans offer a range of options for loan amounts and repayment terms, enabling businesses to select a financial solution that aligns with their operational scale and growth projections.
• Minimal Business History: Startup loans are crafted for emerging enterprises, eliminating the necessity for an extensive business history for loan acquisition.

Commercial Real Estate Financing

The top reason entrepreneurs look for financing is to expand their operations –  42% of businesses cite this as a reason for seeking out loans. Real estate financing is an option for businesses with these goals, allowing them to purchase, develop, or refinance commercial properties.

For smaller businesses, loan amounts might average around $500,000 to $1 million. For larger or more expensive properties or businesses with substantial financing needs, loan amounts can exceed tens of millions of dollars.

These loans typically carry terms from five to 20 years, with interest rates that hover around the 3% to 6% mark, contingent on the lender and the business's credit profile. For down payments, businesses should be prepared to contribute around 20% to 30% of the property's purchase price.

The purchased property often serves as collateral. As a result, some businesses may receive more favorable interest rates. However, beware that defaulting on payments can result in foreclosure.

Are you considering applying for a real estate loan to expand your operations? Consider these benefits:

• Tax Deductions: The interest paid on commercial real estate loans is typically tax-deductible, and businesses may also be eligible for deductions related to property depreciation, maintenance expenses, and other property-related costs.
• Improved Business Credit: Timely repayment of a real estate loan positively impacts a business's credit profile, leading to credit score increases.
• Building Equity: Paying off a real estate loan allows businesses to build equity in the property, offering them a valuable asset that can be leveraged for additional financing.
• Flexible Use of Funds: The funding from real estate loans can used for various business-related needs, such as purchasing commercial properties, acquiring raw land, constructing new facilities, renovating or expanding existing buildings, upgrading infrastructure, and implementing sustainable features.

Equipment Financing

Some businesses may have very specific funding needs, such as purchasing equipment and machinery. There are loans specifically designed for these proposes. Equipment financing is a tailored funding solution designed for a business’s machinery and vehicle acquisition needs.

Typically, loan amounts are closely aligned with the cost of the equipment. You may find loans ranging from as low as $5,000 to upwards of $500,000. For terms and rates, the average term is often between two to five years. Interest rates generally fall between 8% and 30%, contingent on the business’s credit profile and the equipment's lifespan.

Down payments are not always a necessity. Some lenders may provide up to 100% financing, though others may request a down payment, usually around 20%.

Equipment financing offers the following advantages to businesses seeking to equip themselves with the latest technology without depleting their financial reserves:

• Preservation of Capital: This financing option enables businesses to obtain necessary equipment without paying the full cost upfront. As a result, precious funds remain available for other operational expenses and investment opportunities.
• Tax Benefits: The interest paid on an equipment loan can often be deducted as a business expense.
• Competitive Interest Rates: The equipment itself often serves as collateral for the financing, providing lenders with security and sometimes resulting in more favorable terms for borrowers. However, keep in mind that defaulting on an equipment loan can result in repossession of the collateral.
• Diverse Equipment Options: The funds are not limited to one specific type of equipment. Instead, businesses have the flexibility to choose what equipment best suits their operational needs, such as industrial or manufacturing machinery, IT equipment, medical devices, commercial vehicles, office computers, or construction machinery.

Where to Get Commercial Business Loans

Businesses looking for financing may have options tailored to their needs and goals. Here are some avenues where you can apply for commercial business loans:

Banks

Banks are tried and trusted institutions that offer a variety of commercial loans for business, often with higher loan amounts, longer terms, and lower interest rates. And it’s no surprise that banks are the preferred financing institution. However, with these benefits come strict requirements.

Even though it’s a business loan, the personal credit score of the owner(s) is taken into consideration. A score of 680 or higher is generally considered good, but some lenders may have higher or lower requirements.

On the other hand, business scores range between one and 100, with a score of 75 being the general requirement from banks. Many lenders also require businesses to have been in operation for at least two years.

Online Lenders

Startups or businesses looking for more flexible requirements from financers may turn to online lenders for small business commercial loans. These financial institutions typically offer smaller loan amounts with shorter repayment terms and higher interest rates. However, funds can typically be accessed fairly quickly with less stringent requirements.

Given these perks, an increasing number of small businesses are turning to online lenders to explore financing opportunities. In 2021, 23% of small business applicants submitted a financing request through an online lender.

Businesses wanting to explore their online commercial loan options can submit a free request through Lendza. Lendza’s platform is hassle-free and streamlines the process of discovering business financing possibilities.

How to Get a Commercial Loan

While the requirements for a commercial business loan will vary by lender, here are some of the general requirements:

• Business Credit Score: This score reflects your company's creditworthiness and a higher score may enhance your likelihood of loan approval. Different lenders have varied business credit score requirements, yet a score above 75 generally paves the way for favorable loan terms and lower interest rates.
• Personal Credit Score: A high personal credit score, generally 680 or above, signals to lenders that you have a history of handling finances wisely, paying bills on time, and managing credit responsibly. Like a solid business score, a good personal credit score can enhance your commercial loan approval chances and potentially secure more favorable loan terms and lower interest rates.
• Documentation: Your financial statements, including balance sheets, cash flow statements, and profit and loss statements, should be up-to-date and meticulously organized. Lenders will also want to see your tax returns and bank statements, which offer further insights into your business's revenue, financial history, and cash flow. If your loan is related to real estate or physical infrastructure, you’ll need to provide documents such as commercial leases or appraisal reports.
• Business Plan: A well-constructed business plan should encompass a clear outline of your business model, market analysis, sales strategies, and financial projections, offering lenders a comprehensive view of your business operations and growth prospects.
• Debt Service Coverage Ratio (DSCR): This metric evaluates your business’s ability to cover its debt obligations. A DSCR of 1.25 or higher is generally seen as favorable. Before applying, utilize a DCSR calculator to evaluate whether your business can take on additional debt.
• Collateral: Lenders may ask you to pledge assets such as real estate, equipment, or inventory, mitigating their risk and securing the loan amount.
• Time in Business: Typically, a two-year business track record is a common requirement, demonstrating to lenders the sustainability and reliability of your business.

Sum Up

With the right commercial financing option, you can secure the support you need to take your business to new heights. Whether it's small-sum loans to cover daily expenses, a large-sum loan for purchasing real estate, or an advance on outstanding invoices, commercial business loans come in varying types and amounts to fit your unique needs.