Every business owner needs to get outside capital at some point in time, whether it be to help grow an existing business or to cover day to day running costs. Some people will turn to investors for cash, while some people will search their own pockets to get their start-up off the ground. However, many small business owners will apply for a commercial loan to get financing for their business. So, you might be wondering, how to get a commercial loan, what is the process that goes into applying for it, what types of commercial loans are available to apply for? The odds are you will not have the knowledge at the beginning and this will be your first encounter with a loan of any type. If you do a quick google search on how to get a commercial loan, you will see that many articles are discussing this matter. Don’t worry, as we are here to give you an in-depth guide on what a commercial loan is, whether you can apply for it, what is the process of applying for it and how much time it will take for the loan to get approved. These steps are listed as follows;
TYPES OF COMMERCIAL LOANS AND PROVIDERS
We already discussed the first step on what you should do to get a commercial loan, now the second step would be to know about the types of commercial loans that are available and where do you apply to get them. With a lot of providers now eager to work with small business owners, the possibilities are endless. Listed below are the types of commercial loans and where you can apply to get them;
A term loan is probably the first type of loan you think of when you need capital fast. There are three types of term loans; a traditional term loan, a medium-term loan, and a short term loan.
A traditional term loan is a type of loan that banks usually provide. They are the hardest type of loan to qualify for and you can get a large sum in the long term with really low-interest rates.
A medium-term loan is offered by non-bank and online lenders and you can get smaller amounts of around 25,000 dollars to a million on a term of 1 to 5 years. Medium-term loans are easier to qualify for when compared to traditional term loans. People with lower credit scores, a shorter business history, and lower yearly revenues can easily avail this type of loan. However, due to this type of loan being more easier to get than a bank loan, the interest rates are usually high and can range from 6 percent to 25 percent.
If you have a really bad credit history and need money urgently, then a short term loan is the best possible option for you. The amount that can be loaned can be around a maximum of 250,000 dollars with a term of up to 3 to 5 months. However, as it is the easiest type of loan to get, the interest rates can be very high, even higher than a medium-term loan. They can be around 10 percent to 110 percent.
They are the most desired type of business loans for small business owners. This type of loan is backed by the SBA and is a guaranteed type of bank term loan. As it is backed by the government, they can get you around 90 percent of the loan, removing any type of risk that lenders fear when granting loans to a small business owner. However, they are the most difficult to qualify for and everyone cannot get it. If you do get it, it can work just like a traditional commercial loan and you can use it to expand, renovate or use the money to pay for day-to-day operations.
Another common and specific type of commercial loan is known as an equipment loan. Equipment loans help you out in purchasing that expensive piece of equipment that you require to run your business. Equipment loan lenders can loan you as much as 100 percent of the value of the new or used equipment you wish to purchase to run your business. You will be given a period to pay back the loaned cash with a certain amount of interest on top of the loaned money. Once you pay back the money in full, you will own the piece of equipment you bought from the loaned money. If you fail to do so, the lender will take away that piece of equipment as collateral and keep it until you pay back the money in full.
Commercial Real Estate Loans
When you search online on how to get a commercial loan, the most common result would be how to get a commercial real estate loan. That is because both these terms can be used interchangeably. The main use of a commercial real estate loan is to acquire a piece of commercial real estate. This can range from purchasing a new piece of property or renovating an existing one. This type of loan is long term, a large amount, and has very low-interest rates of around 10 percent.
WHAT TYPE OF COMMERCIAL LOAN YOU CAN QUALIFY FOR
The next step would be to see what type of commercial loan you can qualify for. Now that you know of all the options, it may be tempting to apply for either one of them to pursue your funding requirements. However, before you fill out an application form for any of the commercial loan types, it is important to know first hand what type of loan you will be able to qualify for. The type of loan you can qualify for will vary from provider to provider and will be based upon the details of your business. There are three things that lenders generally look at to see if you qualify for a commercial loan or not. They are listed as follows;
Your credit score is the first thing that matters to a lender when seeing if you qualify for a commercial loan or not. They look very closely at it and depending on what credit score you have will determine how much money, term, and rates can apply to you. A good credit score is proof that you have paid all your previous loans on time and the lender can trust you in paying theirs in the same way. A bad credit score usually states that you were not paying previous loans back on time and the lender will hesitate in approving you for the commercial loan. If your credit score is above 680, then you will have a lot of commercial loan options available at your disposal. However, if your score is below 650, then you will only be able to qualify for loans that work on a short term basis like equipment financing, and short term line of credit loans.
Time In Business
Another commercial loan qualification is that how much time you have spent in being an owner of a business. The more time you have been in business, the better it will be for you and you will have a greater chance of qualifying for any type of commercial loan. The longer you have been in business, the more experience you have of running it and the lender will have confidence in you that you will be able to run your business for even longer and return the loan on time. However, 50 percent of businesses usually fail in the first 5 years of coming into existence. So, when a lender sees an application from a business that has only been in existence for 1 or 2 years, they have second thoughts about giving you the commercial loan as they fear you will not be around to pay it back on time. If you have been around for a couple of years, that does not mean you will not be able to qualify for it. If you have seen ups and downs in your business and you have gotten through it unscathed, you will have a chance of getting a commercial loan from a bank, medium-term loan providers, and the SBA. For businesses that have been around for 6 months or less, they can go for cash advances, as they will not be able to qualify for medium or long term commercial loans.
The last thing lenders will consider is how much revenue your business is bringing every year. Lenders will look at the amount of cash and see if you are bringing enough cash to pay back the loan you want to get. For obvious reasons, lenders will not give out a loan that exceeds your yearly revenue. In some cases, lenders will only approve a small percentage of around 25-30 percent of your annual revenue, but that will vary from lender to lender. If your business brings in a lot of yearly revenue, you will be able to qualify for a bank commercial loan, an SBA loan, and a medium-term commercial loan. For businesses with a low amount of yearly revenue, you will be able to qualify for short-term commercial loans.
GETTING COMMERCIAL LOAN APPLICATION READY
Once you have decided what type of loan you want to avail and what type of commercial loan you qualify for, it is now time to get your loan application ready. The next step would be to get your documentation in order. The documents required will vary and depend on the type of commercial loan you want to apply for. For example, if you want to apply for an SBA commercial loan you will need a lot of documentation for the application. For short term commercial loans, it is a relatively easier process and everything is done online. Mostly, you will be required to upload your Tax ID, Social Security Number, and your business’s bank statements. To be fully prepared the documents you might need for every type of commercial loans are business statements, personal statements, Business Tax ID, business tax returns, personal tax returns, loss and profit statements, balance sheet, business financial statements, business legal documents, purpose for the loan, and personal resume and experience letter.
You have now submitted your application to the lender of your choice, with all the related documents. Now it is time to wait. The time that is taken for you to know if you have qualified for the commercial loan or not depends from lender to lender and the type of commercial loan you have applied for. Banks, commercial real estate loan providers, and the SBA take the longest amount of time and can take around 2 to 3 months. Short term loan providers, equipment loan providers, and invoice financers usually take around 2 to 3 days as the process is done using technology, which makes the process go faster.
The Final Words
Whatever reason you may have of applying for a loan, be sure to use the money for the purpose you are getting the loan. Try to stay away from large amounts of loans if you are working on a tight budget and you know that your business will not be able to bring in enough profit to pay the loan back. If you have a business emergency, a short term commercial loan will be a great option for you. If you want some extra cash on the side, you can also consider a short term loan in that instance as well. However, before you even think of applying for such a loan, you should know about it inside out. Today, we have shared with you what a commercial loan is and how can you qualify for it and hopefully, get approved.