There are different types of commercial real estate and commercial loans. A commercial loan is a loan that is made to a business, as opposed to a loan made to an individual. While the term can apply loans made to businesses, it can also describe larger loans that are made to large and medium companies. Small businesses are often prevented from having access to equity markets and bonds for financing, mostly by hurdles such as expensive upfront costs. Business owners can rely on commercial loans to stay afloat.
Commercial loans, as you can guess from the names, differ from the other loans you can borrow. Lenders may be willing to offer flexible payment terms with large-sized commercial loans. Qualifying for this kind of loan can be difficult and the process depends on the lender. Traditional lenders have lengthy and more formal applications, while online lenders may have a quick process where they verify your income. If you want to qualify for a commercial real estate loan, your business should have a long track record, generate high revenue and have greater collateral that you’d need for a small business loan.
Different Types Of Commercial Loans
Commercial loans are broken down into different categories, depending on what the loan will be used for and the repayment process. Some different types include:
1. Term Loans
A term loan is a loan provided to a business that requires payment within a given time limit. Its interest rate is fixed and its repayment schedule is monthly or quarterly. It also comes with a set maturity date. Term loans can be secure, where some collateral is provided, or unsecured. The interest rate is much lower for the secured term loan compared to the unsecured one. There are three classifications of term loans depending on the repayment period:
• Short term loan: Has a repayment period of less than a year
• Medium-term loan: Should be repaid between 1 and 3 years
• Long-term loan: Has a repayment period of over 3 years
The terms and conditions of term loans are clear before the loan is granted. If your budget is tight, this loan will give you clarity and control.
2. Line Of Credit
With this commercial loan, you can borrow loans up to your credit limit. There is a maximum borrowing amount provided by the lender for your business. Payments for the loan are done and then you can borrow again. These loans are mostly designed for short term business needs. Frequent borrowers benefit a lot from the line of credit loans. The interest rates on line-of-credit loans are lower and you can always negotiate the terms of repayment with the lender.
3. Commercial Real Estate Loans
Owners of commercial properties need mortgages when they are planning to construct buildings. Additional financing is also sometimes needed after the buildings have already been constructed, to keep them in good condition and fully leased. These loans help you purchase, build or refinance office buildings, industrial buildings, retail buildings, apartments, warehouses and many more. There are three classes of buildings the class A real estate, class B real estate, and class C real estate buildings. The property that is gained or refinanced is usually the collateral.
4. Equipment And Vehicle Loans
Expensive assets or pieces of equipment for your business can be bought using this type of loan. You can purchase computers, new or refurbished cars, heavy equipment, vans, trucks or any other piece of machinery with it. The terms of repayment depending on the type of collateral. To avoid putting up another form of collateral, consider securing the loan using just the asset itself.
5. SBA commercial Loans
These loans are part of a program belonging to the government that is run by Small Business Administration. Similar loan options such as real estate, term, and lines of credit are offered. The SBA partially guaranteed the repayment of the business loan but does not lend the money itself. The bank or a private lender gives you the loan, and in case your business does not pay back everything, some of the loss is covered by the SBA. Despite the name, SBA’s loan programs are extensive and can be useful even for medium-sized businesses.
6. Letter Of Credit
This is a document that is issued by a bank or financial institution, that assures payment to a seller, provided required documents are presented to the financial institution. This ensures that as long as the services are performed, usually the dispatch of goods, the payment will be made. The seller is guaranteed by the Letter of Credit that she or he will receive payment as agreed. It is often used when traders do not each other well or when goods are sold to customers that are overseas.
7. Revolver & Revolver-to-Term Loans
These loans are flexible compared to term loans. They allow you to take the amount of loan that you need and repay it on a schedule that suits you best. The revolver loan remains available in full to the borrower even after repayment, unlike the line of credit. If you are worried that this type of loan will affect you financially, there’s always a revolver-to-term loan. With it, you are flexible to repay your loan even more than once. If you need to get your business up and running, you can take out this loan and after the revolving period ends, you can take a term loan that has a fixed repayment schedule.
8. Construction Loans
These loans help pay for construction costs such as labor or materials until your residential, retail or commercial project can be refinanced. Incorporating buying the land as part of the loan will save you time and money. The building materials are used as collateral in this loan. The repayment period is usually around a year but an extension can be negotiated. These loans are usually given by local lenders because there have to be regular inspections called progress inspections at the property to inspect the construction’s progress.
Commercial loans can be very helpful with mid-sized companies for various industries. Your chances of qualifying for this loan are much better now compared to a few years ago because of an increase of the traditional lenders like credit unions and banks. If you are a business owner, you should consider borrowing money when you need to, so that lack of cash won’t stop you from expanding your business.