How to Get a Commercial Loan

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.

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.