Buy and Borrow

What Business Owners Should Know About Commercial Loans

Erin Palmer

August 23, 2017

small business owners

As a business owner, your needs will likely change as your business does. And that’s a wonderful thing!

As your business grows, so will your needs. You might require vehicles or new equipment. Or perhaps you’ve grown to need new office space, manufacturing facilities or warehouses to store inventory.

A commercial loan can help you get the funding you need for your business. They could be used for a number of business needs, like:

  • Purchasing or refinancing property
  • Making property improvements
  • Getting commercial vehicles
  • Purchasing equipment for your business

Let’s explore some of the basics of commercial loans so you know what they are, how they can be used and what to keep in mind before applying for one.

Commercial Loan Terminology

Once you get familiar with common loan terminology, it can be much easier to understand the paperwork and other parts of the process. So let’s get to know the lingo a bit so you’ll be ready to begin the process.

Annual percentage rate (APR) – this rate lets business owners know the total yearly costs for borrowing money from a lender. It includes interest rates and other costs connected to the loan.

Commercial real estate loan – a loan that is used to fund real estate that is used for a business, like office space or a retail location.

Lien – a legal term for a right that guarantees that a loan or debt will be repaid. If the loan or debt isn’t repaid, the lienholder may seize the asset (property, vehicle, etc.) that the loan was used for.

Repayment terms – the specific terms for repaying your commercial loan. Terms vary based on the specifics of your loan. For example, commercial real estate loans may offer amortized loans with fixed terms for a specific number of years.

Small Business Administration (SBA) – this U.S. government agency exists to meet the needs of entrepreneurs and small business owners. The SBA also partners with certain financial institutions to provide SBA loan options for small business owners.

What Lenders Look for in Commercial Loans

Lenders review a number of factors when they review commercial loan applications so they can get to know you better. Before you apply, make sure that you have what lenders are looking for.

Examples of what lenders look for in commercial loan applicants may include:

  • You should have the assets needed to survive fluctuations in your business while still paying off your loan
  • Your business should bring in enough money to make it possible to repay your loan
  • You should have a good credit history with proven creditworthiness as a business owner demonstrating that you’ve financial obligations on time and in full
  • If your business is new, you may need to demonstrate your ability to make a profit and how long you’ve been in business
  • If you spouse or significant other is also a part-owner, they may need to co-sign the loan.

Keep in mind that your interest rate could be affected by the degree of risk for your business. Make a detailed business/growth plan and invest in market research to help mitigate some of these risks. 

Questions to Ask Yourself Before Applying for a Commercial Loan

Preparation is the best thing you can do to help increase your chances of getting the commercial loan you need. Make sure you understand exactly what you’re looking for and what you will need to provide throughout the process.

Before you apply for a commercial loan, ask yourself these questions:

  • What are the specific things that the commercial loan will be used for?
  • What amount do you need?
  • How will you repay the loan?
  • Do you have collateral or a personal guaranty that you can use for the loan?

If you’re applying for a commercial real estate loan, you may want to ask yourself additional questions, such as:

  • How much money are you able to put toward a down payment?
  • When do you need the funds?
  • Do you have all the proper documentation you will need?

Get organized, prepare your paperwork and don’t be afraid to ask questions throughout the process. Use the same tenacity you bring to your business every day and get the loan you need!

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