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Need help with a Commercial Loan?
What Is a Commercial Loan?
A commercial loan is a money-lending relationship between a business and a financial institution. Businesses typically take out loans because they are growing at a rate where they require expansion of some type, which may include more equipment, office space, and even more robust operations. Without a loan, many businesses wouldn't have the capital to be able to hit their goals or benchmarks for growth. However, with the loan, business owners are better able to grow the business and generate the revenue they need to not only pay back the loan but to increase their capital, too.
How Commercial Loans Work
Most business owners apply for a commercial loan so they can get to the next stage in their business. This short-term funding helps with the operations of the company on either a large or small scale. Loans can be used for nearly anything from the purchase of a commercial building to funds needed to pay a surge of contract employees.
Once a business owner has identified that their company is in need of a loan to continue operations, they usually have to approach the financial institution with collateral. This collateral will end up becoming the bank's property if the business defaults on its loan or goes bankrupt.
When making a lending decision and signing a loan rate with terms, the financial institution may look at a number of factors, including:
- Your company's finances: Similar to consumer loans, an institution issuing the loan will want to take a look at your company's finances, debt service coverage ratio (similar to the debt-to-income ratio for consumer loans), and credit profile to determine your company's creditworthiness and ability to repay the debt. The financial institution wants to see the company's balance sheets to showcase cash flow and any liabilities it currently has.
- Your personal information: It's common for an individual to have a better credit history and credit score than their business, especially if the business is new. In this case, the bank may request information to assess your personal creditworthiness too.
- The property you need a loan for, if applicable: If you're applying for a real estate or construction loan for your business, the financial institution may also want information about the property to determine things like appraised value.
Types of Commercial Loans
Here are a few of the many types of business loans:
- Business line of credit: A business line of credit is similar to a credit card in that it's revolving. It's useful if you need a lump-sum of cash, want to choose when and how you use it, and want to avoid paying interest on any amount you don't end up using.
- Business credit cards: This is a common loan that small businesses take on so they can track expenses, manage spending, and purchase items they may not be able to afford with cash. Just like consumer credit cards, interest rates vary depending on creditworthiness. Because of this, look for credit card offers that suit you well, like a 0% introductory APR or a card that gives rewards based on how much you use it.
- Construction loans: Construction loans are specifically to build new property, renovate existing property, or make repairs. You can use the loan funds to pay a company to perform the work and to pay for the cost of materials.
- Hard money loan: These loans usually have short loan terms of mere months up to two years. They are mostly issued by private investors who charge a higher interest rate, but they can be useful for business owners who need money quickly and expect to pay off the loan quickly, too.
- Blanket loan: If you have multiple properties, then a blanket loan may be a good option as long as you understand the downsides. While a blanket loan may be very convenient for you to manage funds, they usually involve hefty payments and strong penalties if you default on the loan.
- Real estate loan: Real estate loans are for purchasing new business property. Loan terms typically range from five to 20 years, and it's not uncommon to have a balloon payment after a specific number of years of the term. You may also expect to pay higher interest rates and fees for items like an appraisal, survey, and loan origination documents. Many business owners who don't want to purchase property rent it instead. If you want to go this route, there are different types of commercial real estate leases to be aware of.
- SBA loans: These loans are given by lenders and backed by the Small Business Administration. There are many loans available through the SBA, but in general, the requirements are that your business is a small for-profit entity that operates in the United States. These loans give your business a surge of capital to use on what you need.
Where to Get a Commercial Loan
While you may immediately think of a bank for where you should go to get a commercial loan for your business, there are other options. Here are some details about banks and other options for lenders:
- Banks: Banks typically provide good rates and long-term options to keep payments reasonable for the business. However, they tend to be more selective and the process for acquiring a loan is longer.
- Commercial lender: A commercial lender is not a bank, but is still able to issue loans. You can expect lower costs and faster approval compared to banks, but the interest rates are usually higher and the loans are short-term.
- Hard-money lenders: Private companies usually dole out hard-money loans, which are short-term and require little time or documentation for approval. However, these lenders typically charge higher interest rates.
- Crowdlending: Crowdlending happens on marketplaces where borrowers and lenders are matched according to need. There is little regulation on these platforms, so engage at your own risk.
Advantages of a Commercial Loan
It's helpful to know the advantages of a commercial loan so you can make the right decision for your business. Advantages include:
- Money right away: Even if the loan approval process is lengthy, you'll end up with funds more quickly than saving your revenue and waiting for your available funds to be what you need them to be.
- Manageable payments: Even if you take out a large loan, you should have a manageable repayment amount every month.
- Tax-deductible interest: Although you will be paying interest on your commercial loan, the interest you pay is tax-deductible, which can help you at the end of the year.
- No need to bring on investors: You either started your business on your own or with a core group of people. You could bring on an investor who will supply the business with needed funds, but then you are probably also giving up a part of your ownership in the business in exchange. A commercial loan can give you the capital you need without compromising your percent of ownership in the company.
Commercial loans are a great way to get the cash you need to continue growing your business, which is a business owner's dream. Commercial loans are not something to shy away from; rather, they can provide the means to get the equipment, property, and people you require to make your business an even bigger success.
Meet some of our Commercial Loan Lawyers
Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.
Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.
George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.
My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.
Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.
Brad is a business attorney with experience helping startup and growing companies in a variety of industries. He has served as general counsel for innovative companies and has developed a broad knowledge base that allows for a complete understanding of business needs.