How Do Commercial Loans Work?
A commercial loan, also known as a business loan, is lending that’s designed for commercial enterprises, as opposed to an individual. It’s typically used to fund major expenditures within a company, such as operational costs and capital expenses. Commercial loans are also typically used to assist with short-term funding, the purchase of equipment, or to acquire supplies that are used in the production and manufacturing process.
In this guide, we share critical information you should know before you take a commercial loan to help you find your best financing option.
Requirements in Commercial Lending
To qualify for business loans, some form of collateral is usually required which may be in the form of property or highly expensive equipment. This is called a secured loan. In some cases, even future accounts receivables can be used as collateral for this type of loan.
Unsecured loans, on the other hand, are for companies that don’t have enough assets for a secured loan. They are, however, more expensive since the lender is taking a bigger risk.
For unsecured loans, the lender will look more closely at your credit rating and may sometimes require a personal guarantee.
When an individual agrees to provide a personal guarantee, he or she agrees to take on the debt obligations if the company defaults on their loan repayment.
If you’re a new business, a lender may still offer you alternative financing options. For more substantial amounts, however, your business is usually required to be in operation for a period of no less than three or six months to qualify for commercial loans.
Choosing the Right Commercial Loan
Many of the business loans offered today are not as well-structured and affordable as they should be, which may lead to more financial hurdles for your company.
In fact, many institutions that offer commercial lending, such as banks, still make it challenging for small and medium-sized businesses to grow. Part of the problem lies in the flexibility of these business loans.
The importance of flexibility when searching for commercial lending options can’t be stated enough, especially for startups and companies undergoing a costly expansion.
Flexibility, in the world of consumer finance, can mean two things: the ability to change the term of the loan, and the ability to borrow as little or as much as you require.
Because commercial lending options are designed for larger corporations, they’re also largely unregulated. Major banks are more likely to compete to provide you with competitive lending options with a focus on speed, flexibility, and service.