How Commercial Loans Differ From Your Average Consumer Loan
By the time you’re ready to start your own business, you’ve probably obtained a consumer loan or two, such as an auto loan or a mortgage loan. So when you need a business loan, you might think you know everything you need to know about loans. While there are many ways in which commercial loans and consumer loans are similar, they also have some important differences you should know about.
For a consumer loan, lenders will want to see proof that you have good credit and sufficient income to pay off the loan. They’ll check your credit report, and will want copies of tax returns and pay stubs. Your loan application will ask questions about how long you have been employed, whether you rent or own your home and how big your mortgage or rent payments are.
For a business loan, the lender will investigate the credit-worthiness of the business, which requires a lot more documentation than a consumer loan. For instance, potential lenders want to see several years’ worth of financial statements; these may need to be audited or prepared by a certified public accountant. They will also want to see tax returns for the business, and may ask for your contracts with customers, distributors, vendors and suppliers.
If your business is a startup without a track record, the lenders will look at your personal credit rating and personal financial situation. Whether your business is new or up and running, the lender will also want to see a business plan documenting your business model, competitive landscape and points of differentiation, marketing strategy, management team and financial statements and projections. They’ll want to know how you plan to use the loan proceeds—such as for working capital or to buy new equipment—and how that will help your business grow and make enough money to pay back the loan.
Commercial loans usually have shorter terms than consumer loans. For example, while mortgage loans are typically for 30 years, short-term commercial loans need to be paid back within 3 months to 3 years. Longer-term business loans, for 5 to 10 years, need to be secured by more collateral.
When you obtain a consumer loan, all the lender requires afterwards is that you make the payments on time and in full. With a commercial loan, even if you make all your payments on time, the lender will follow up with you annually to request documentation such as financial statements or proof of insurance on the equipment or property you put up as collateral. Some commercial loans have a feature that allows the bank to “call” the loan or request payment in full, even if you’ve been making scheduled payments, if they think something has changed in your business’s financial situation.
Consumer loans can come from banks, credit unions or finance companies that specialize in certain types of loans such as auto loans or mortgage loans. After the financial crisis of 2008, Congress passed the Dodd-Frank Act, which tightened regulations on consumer lending. New regulations are still being rolled out, which means there is a lot of information for lenders to keep up with. As a result, many lenders are cutting back on the types of consumer loans they offer and specializing in one or two areas.
Commercial loans can come from banks or commercial finance companies, and less frequently from credit unions. Many credit unions don’t have sufficient assets to lend to businesses under the new federal regulations. When looking at commercial loan rates, it’s a good idea to seek out an SBA approved lender. These are banks that do a high volume of commercial loans guaranteed by the Small Business Administration. You may also have more luck obtaining a loan from a smaller, community bank; these banks often have more flexibility in lending than bigger ones. Lastly, you can consider going online for a small business loan and applying with a non-bank lender.
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