How Does A Commercial Loan Work?

Not all types of loans are created equal – some are meant for those who intend to purchase a home, while some types of loans are for those who require start-up funds for businesses, or those who are already in the business requiring more capital to take their operations to the next level. 

You need to understand what is a commercial loan and how does it work. The first thing that you need to know about commercial loans is that these can often be negotiated. Unlike residential loans, which have a set interest rate, commercial loans work differently and if lucky, you can negotiate most of the terms to suit your business’ needs.

The next thing you need to figure out is how to apply for a commercial loanWhen applying for a loan, you’ll often be asked on which establishment or business you’re planning on purchasing or financing. The better the security, the higher your chances of getting approved.

Security types may include but are not limited to factories, offices, retail spaces, warehouses, shop fronts, and in some cases, residential properties. These are considered to be of standard security, and the lender is most likely to grant your loan.

On the other hand, there are types of securities that are considered to be risky, which either means that you’ll get a higher interest rate as they’re more difficult to sell. Some examples of specialized properties are car yards, preschools or child care centers, accommodation, private schools, supermarkets, and vineyards. 

For securities falling under specialized properties, the bank needs to conduct a risk assessment and a complete valuation of the property before the loan gets approved. Most often than not, you’ll also be asked to make an initial deposit or give a commercial loan downpayment to get faster approval on your loan.

Financial Documents Required For Commercial Loans

Banks and other lending companies may set their own lending policies, in addition to these financial documents to prove that the borrower is capable of paying off the loan. 

Some lenders may require just one of these, while some others may require you to provide more documents. If you’re planning on getting a commercial loan, the lender may require you to present legal and financial documents with your financial statements. Some may require full documents, while some others may only require you to provide low documents. Low doc doesn’t necessarily require the full financial statement, but a partial proof of income evidence such as a bank statement or letter from your accountant.

How Much Can You Borrow

The amount you can borrow or will be granted to you generally varies based on numerous factors. While rules may vary depending on your lender, these are the general rates and amounts that you can borrow based on the property value.

100% – You can get up to 100% of the total value of the property if you have an entity backing up your loan, or a guarantor. 

$1,000,000 – For loans amounting to $1m, you may borrow up to 80% of the property’s value.

$2,000,000 – Get up to 75% of the property’s value for loans amounting to $2m and below

$5,000,000 – Your loan may be granted 70% of its total property value

$5,000,000 to $50,000,000 – The amount you may receive may vary depending on the lender, and the terms they’d set. It’s best to inquire with the bank or the lender of their terms and negotiate whenever needed. 

How To Get Your Commercial Loan Approved

Choose The Right Lender

Finding the right lender plays a crucial role in getting your loan approved. You can always check banks and their interest rates, and see which one offers the best rates with the best terms.  When choosing a bank, make sure that you go with those that specialize or dominating within the commercial banking niche.

By going with a lender that has handled commercial loans and properties like yours, your chances of getting a better deal and getting approved.

Present Your Case

Filling up an application form isn’t just enough. Make sure that you highlight what makes your business different and convince them whey they should grant you the loan. 

Some banks have their own template and want to keep the information simple and clear, while some banks would like to see more information from the borrower as much as possible.


What happens if the bank denies your application for a commercial loan? This doesn’t mean that you can’t get the loan you’re applying for. There are different ways to approach this and one way is by providing more information, and/or change the way you approach your situation to better suit and match their guidelines. 

Wrapping Up:

Regardless of the bank that you choose, make sure that you always take caution with the person you’re about to do business with. Always make sure that you have the financial documents ready with you, and if in doubt, you can always seek help from a mortgage broker to help you file your commercial loan application. Take note though, that not all mortgage brokers are the same. Take some time to find and research experienced commercial mortgage brokers that will help you out from the beginning of your commercial loan application, up to the point you’re ready to purchase or pay for the property.