November 14, 2018 | By Peyton Sawyer
If you were to define a commercial loan, it's essentially a debt-based funding agreement between a business/business owner and a financial institution. A financial institution, such as a bank or lender, is used to fund major capital expenditures or cover costs that a business cannot afford. Often times small businesses do not have access to traditional financing methods and rely on lending products that can provide them with a line of credit, a term loan, or an unsecured loan to make ends meet.
Qualifying for Commercial Lending
A commercial loan can be used for many business needs. Typically, a commercial loan is used to receive funding for operational costs or purchasing new equipment, but it can also be used to purchase inventory and supplies, or to even fund payroll. Commercial loans are a short-term loan option available to a large variety of business entities.
To be considered for approval, this type of loan will often require business collateral. The form of collateral can be in the form of property or equipment that can be used if the borrower is in default of their loan or files for bankruptcy. That means that the collateral used to receive the commercial loan can be confiscated due to non-payment. There may be instances when a mortgage issued to commercial real estate can be used to qualify for a commercial loan, or even cash flow generated from future accounts receivable. This is determined by the lender.
Renewing Your Commercial Loan
A business that handles large orders on a seasonal basis can sometimes be considered for a renewable commercial loan. This allows the business owner to provide their products and services to customers throughout the year. The word “renewable” means that a business owner may be able to extend their loan indefinitely after the initial loan is paid in full within the specified period. Once the first loan is satisfied, it can be rolled into an additional or renewed loan period.
When applying for any type of loan, credit is the first hurdle to overcome. While a traditional banking institution will view your credit worthiness with a score, a commercial loan will consider your approval based on spreadsheet and documentation that reflect a consistent cash flow. By doing this, the lender can determine if you are a good investment. Any lender, traditional or alternative, that provides business funding will want the assurance that the loan with be repaid within the specified loan period. To reduce the risk of a bad investment, they must collect the necessary documentation.
The services a lender can provide with commercial funding may give your business the boost it needs to become more sustainable, but be sure your business can afford tp repay the loan. If your business is approved for commercial lending, you can expect to pay an interest rate that falls in line with the prime lending rate during that time period. Check to see what that rate is before signing off on a loan agreement.