As a business owner, there’s a good chance that at some point you will find yourself in need of extra cash. There are various reasons - like keeping your business running or growing into the next phase. When this happens, a great place to turn to is a commercial loan.
What are Commercial Loans?
Commercial loans are offered by banks, commercial lenders, and other financial institutions for the purpose of helping businesses get what they need - for whatever they need. This could mean anything from purchasing equipment to extra cash flow. Commercial loans will normally require a down payment and have a loan to value (LTV) ratio of around 65% to 85% 1 , with some SBA and USDA options going up to 90%. This basically means that lenders will be willing to lend up to a certain percentage of the value of the asset and you’ll cover the rest in a down payment. Since commercial financing can cover a wide range of needs, there are various types of loans that come with different terms. Your business will have multiple options for getting the funds it needs, no matter the situation you find yourself in. It’s just a matter of taking the right steps.
How Commercial Loans Work
Commercial loans offer the funding that businesses of various sizes need to keep running or grow. These loans could be used to cover short-term operating costs or the purchase of large equipment. Depending on the down-payment for the loan, lenders may require collateral to be put down which could range from the equipment you are purchasing to other larger assets that you own. If your business defaults, the lender would take possession of this collateral. While most commercial loans have terms around 3 to 10 years, they can often be extended to allow your business more time if needed. A loan to purchase farm equipment or a mortgage for a commercial building are good examples of commercial loans.
What are the benefits of a commercial loan?
Lenders offer the lowest interest rates of any loan type on commercial loans at terms that allow your business more time to pay the money back. These favorable terms reduce the risk of default and enable businesses to access critical funding while maintaining lower overhead costs. They are also suitable for covering substantial startup expenses with a single loan, making them a practical choice for entrepreneurs.
Additionally, commercial loans allow business owners to retain complete ownership of their companies. This is in contrast to venture capital investments, which typically involve giving up a portion of ownership to investors.
Overall, commercial loans are known for their cost-effectiveness, offering a secure and flexible way to obtain startup capital while preserving full control over your business.
Where to get a commercial loan
Bank and Credit Unions
Finding a local bank or credit union is a great option when you’re looking for a lender to partner with your business long-term. Local lenders will understand the market in your area, offering insight to guide your business. Working with the same bank or credit union over time will also create a level of trust that could open up more opportunities in the future. You could choose to go with a nationwide bank or credit union if you already have a relationship with them, but you may find more flexibility with a bank that makes lending decisions locally. Banks and credit unions can also offer assistance in getting loans through the U.S. Small Business Administration, making the process easier to understand. Get started here with Southern Bank.
U.S. Small Business Administration (SBA)
Getting a commercial loan through the Small Business Administration (SBA) is an excellent option for entrepreneurs looking for government-backed financing. The SBA offers various loan programs designed to assist small businesses in securing the capital they need to start, expand, or sustain their operations. These loans often feature favorable terms, such as lower interest rates and longer repayment periods, making them an attractive choice for small business owners. To explore the SBA's loan programs and learn more about eligibility criteria and application procedures, visit their official website at https://www.sba.gov/funding-programs/loans.
Online Lenders
If you’re having trouble finding something close by, you might be able to find what you’re looking for in an online lender. These banks and financial institutions save money by reducing overhead from brick and mortar branches. This allows them to offer better terms and interest rates to their customers. You may also find commercial loan options While they make it easy to see your account online, the downside is that without a location nearby, your account is less accessible.
Nonprofit Lender
Working with a nonprofit lender can be beneficial to business owners who are unable to get capital elsewhere. Small business owners often find success and develop relationships with nonprofit lenders because their mission is to support community economic development. Most nonprofit lenders tend to focus on loans of $50,000 or under. A non-profit lender is looking to empower small business owners with the potential to help a community grow.
Steps to getting a Commercial loan
We’ve put together these steps to guide you through your options, save you some time, and help you get exactly what your business needs.
Step 1: Determine what the loan will be used for
This may seem simple, but it’s an important first step that will help you with decisions later on like which type of loan makes sense and whether you pursue one. Some reasons to get a loan include:
- Extra cash flow for a down season
- Repairing old or purchasing new equipment
- Growing an established business
- Getting a new business off the ground
- Buying, renovating, or building a new location
Once you know why you need a loan, it will guide you in the next step as you review the different options.
Step 2: Find the right type of commercial loan
After deciding on why you need a loan, the next step is to look through the different options available and decide which type of loan makes sense. Here is a list of different business loan options that we offer at Southern Bank:
Working Capital Loans
Working capital loans give you funds to cover operating costs for your business. This will allow you to overcome seasonal cash flow or accounts receivable gaps, take advantage of unique opportunities, or cover additional project expenses. They are normally short term, unsecured loans - meaning there’s nothing used as collateral on the loan. For this reason, they tend to have a shorter payoff and higher interest rates than other options. To read more about working capital loans, visit this page.
Commercial Real Estate Loans
If you’re looking to purchase commercial property, renovate your current place, refinance real estate debt, or plan for construction of a brand-new location, a commercial real estate loan may be what you need.
These have shorter loan terms than a traditional mortgage - up to 10 years, and amortizations up to 20 years. This basically means your monthly payment is based on a 20-year loan, with the remainder due in a balloon payment at 10 years. Commercial real estate loans also require a down payment of at least 20%. Keep in mind that term and interest rates will be different from what you’d expect to see with something like a traditional mortgage, because commercial financing rates are generally higher. 2
SBA and USDA loans
At Southern Bank, we work with the Small Business Administration (SBA) and United States Department of Agriculture (USDA) to provide small business loans. These loans typically offer better terms like a lower monthly payment or lower rates. The process may take longer, 60 to 90 days,3 and may require a higher credit score. Here are some of the options we help with:
SBA 504 Loans - Used to purchase real estate and long-term equipment, SBA 504 loans offer terms up to 25 years, below market interest rates, and require as little as 10% down.
SBA 7(a) loans - Can be used for construction, renovation, or buying land or buildings. SBA 7(a) loans allow you to borrow up to $5,000,000 for 25 years for commercial real estate, or 10 years for other purposes with either a fixed or variable interest rate.
USDA Loans - Designed to stimulate growth in rural areas, USDA Rural Development Authority loans make private credit more available by guaranteeing loans for rural businesses.
You can find out more about our USDA and SBA loan programs here.
Equipment loans
You never know when the next big opportunity might come to start offering a new product or service. You also never know when the equipment you’re currently using might break down. In either situation, being able to purchase or repair equipment might be necessary, and you may or may not have the funds available or on hand to make it happen. Equipment loans offer quick approval and flexible payment schedules. They are secured by the equipment you purchase, meaning you could also get better loan terms, even up to 100% of the equipment cost.4 Equipment loans can be used to purchase a wide range of things, such as:
- Medical and dental equipment
- Commercial vehicles
- Computers, monitors, printers, or copiers
- Specialized machinery
- Construction equipment and tools
- Agriculture equipment
- Heavy industrial equipment
If you want to learn more about equipment loans or get started, visit our equipment loan page here.
Step 3: Get your documents together
In general, commercial loans are harder to get approved for. This is because there are fewer protections for lenders in the case of default, making them riskier for financial institutions. Lenders will rely instead on other factors, like the borrower's credit, time in business, and real property pledged as security, when deciding on approval and terms. You’ll need to provide documentation to show a lender this information in order to qualify for a commercial loan.
The specific documents needed will change depending on the lender, but in general, they will be looking at:
- Business financial documents (often for the past 3-5 years) - Balance sheets, income statements, tax returns, etc.
- Personal financial statements
- Business plans
- Credit history
- Detailed information on collateral
- Appraisals
If you are a new business, don’t worry if some of this information isn’t available yet. Most lenders will have specific requirements for startups, which may involve a closer look at the personal credit and finances of the business owners.
Step 4: Compare lenders
You have plenty of options for commercial lending from online lenders to commercial lenders in your area, as well as local banks. Some will give you quotes without having to apply, and while they aren’t set in stone, it could give you an idea of what you’ll qualify for. Getting multiple quotes will allow you to compare lenders and choose what is best for your business.
At Southern Bank we have lenders that are here for your business, who understand the market in your area and can work with you to get exactly what you need. To find a lender you can lean on, search for one in your area here - Find a Lender.
Commercial loan rates
At Southern Bank we offer competitive rates on commercial loans - opening the door to your next big project. Whether you’re looking to purchase equipment or real estate, we can help you get the right interest rate on your commercial loan. Reach out to one of our lenders to find what interest rate your business could qualify for.
Step 5: Apply
Each lender will have a different application process. When applying for a commercial loan you’ll need information from the documents listed above. If you have questions, you should be able to reach out to the lender for assistance. Once you’ve filled out the loan application and supplied the necessary documents, the lender will obtain underwriting approval on the loan and then it will be reviewed. After final underwriting the lender will make an offer, which takes us to the last step.
Step 6: Close on your loan
Once you’ve received an official offer from a lender, you’ll sign a letter of intent. The entire loan will go through another review and upon approval, you’ll sign the final documents and receive the funds or a line of credit.
And now you’re ready to execute the plan that you started with to grow your business - and we’ll be here to keep helping you every step of the way.
Apply Today - Reach out to a Southern Bank lender.
Frequently Asked Questions
How much do I have to put down for a commercial loan?
Commercial loans will normally require a downpayment in the range of 20% to 40% of the loan. Where you land within this range will come down to a number of different factors including your credit history, current cash flows, the type of commercial property being purchased, and your relationship with the lender.
How to repay your commercial loan?
Commercial loans normally have terms running anywhere from 5 to 25 years and repayment can be structured different ways. Loans are often repaid using amortization, which gives you a fixed interest rate and fixed payment over the life of the loan. This gives your business a consistent payment and makes the burden of interest a little easier by spacing it out. Your interest may also be tax deductible as an added benefit. The downside here is that there could be penalties for paying the loan off early and it might take longer to fully pay off the loan.
Another option is to set up interest-only payments. This will lower your payment since you are only paying the interest, however you will still owe the principal balance until it’s paid. This is a good option if you plan on refinancing or repaying the loan fully in a few years.
You can also consider a balloon payment mortgage to get lower payments on your loan. This is when you make payments on interest and principal, with the remaining balance due in a balloon payment after a shorter period. This can be risky, but it’s a good option if you plan on having the funds to repay your loan soon.
You could also consider an Adjustable Rate Mortgage (ARM) which offers lower interest rates in the beginning, creating a lower initial payment. The downside is that you risk having higher payments if interest rates increase.
Overall, make sure that you fully understand the details of your loan and how repayment is going to work. If you need clarification, ask your lender and read the details of the contract before signing.
What’s the difference between a commercial loan and a residential loan?
Commercial Loans:
- Normally given to business entities like corporations, LLC’s, contractors, or developers.
- Can range anywhere from 5 to 20 years and the amortization period is often longer than the loan term.
- Loan-to-value (LTV) ratio normally falls within the range of 65% to 80%. Higher LTV’s are possible, but uncommon.
- Generally have higher interest rates than residential loans and include more fees that add to the over cost of the loan.
Residential Loans:
- Usually made to individual borrowers
- The most common loan term is 30 years, but residential mortgages can be as short as 10 years.
- High Loan-to-value (LTV) ratios going up to as much as 100% with certain loan programs.
- Lower interest rates than commercial loans and fewer fees.
Disclosures & References:
1
Jean Folger, Commercial Real Estate Loan, investopedia.com, Nov 30, 2021,
https://www.investopedia.com/articles/personal-finance/100314/commercial-real-estate-loans.asp
2
Katie Duncan, Buying Investment Property with a Commercial Real Estate Loan vs Conventional Mortgage, goamplify.com, Accessed: Oct 15, 2022,
https://www.goamplify.com/blog/business/investment-property-commercial-mortgage/
3
Leanne Eicoff, How to Get a Commercial Loan in 5 Steps, commercialloandirect.com, Accessed: Oct 15, 2022,
https://www.commercialloandirect.com/5-steps-to-get-a-commercial-loan
4
Meredith Wood, How to Get a Commercial Loan: The Step-by-Step Guide, fundera.com, Oct 1, 2020,
https://www.fundera.com/business-loans/guides/how-to-get-a-commercial-loan