What Is a Commercial Loan?
A commercial loan is debt-based financing that can go toward business expenses like working capital, equipment, and even real estate. Both banks and private business lenders offer commercial financing, and there are several types of commercial loans, ranging from traditional term loans to SBA loans to online loans. Each form of commercial financing works differently and has different commercial loan rates, eligibility requirements, and repayment terms.
The top seven commercial loans of 2021 are:
- Traditional term loans
- Short-term loans
- SBA loans
- Equipment loans
- Commercial real estate loans
- Business lines of credit
- Merchant cash advances
Learn all the details about these seven best commercial loans, their current rates, and what you need to know before you apply for these types of business loans.
Is Commercial Financing Offered at Your Bank?
When you’re on the hunt for commercial lending, the most common place to start is a bank. In the past, your local bank was the only place to get commercial loans. Now, there are many alternatives—but banks still offer the most affordable rates and have a physical presence in your community. So they’re a good place to start searching for your loan.
If you do get approved for a commercial loan from a bank, consider yourself lucky. Although bank lending is on the upswing, less than half of small business owners qualify for a bank loan.
Since the 2008 recession, banks have been slow to approve commercial loans for small businesses. The lucky few who do get bank loans have excellent credit and established, profitable businesses.
In addition, getting a bank loan is difficult if you only need a small amount of capital. Banks prefer larger loan sizes—over $250,000—because commercial lending in large chunks is more profitable for them.
Top Commercial Loan Options to Consider
As you now know, bank commercial lending isn’t particularly small-business-friendly. But don’t worry—if your local banks won’t work with you, there are still great commercial loans out there for your small business. If you’re working with less-than-perfect credentials or you’ve already been denied commercial financing from your bank, consider these top commercial loan options:
1. Traditional Term Loans
- Loan Amount: $5,000 to $500,000
- Loan Term: One to five years
- Loan Rates: 7% to 30%
A traditional business term loan is what most people associate with commercial loans. You borrow a set amount of money from a lender to grow your business, which you’ll pay back, plus interest, over time.
Banks offer long-term loans that have 10-, 20-, even 25-year repayment periods. However, you can also find great medium-term loans from online, alternative commercial financing companies. These types of loans have two- to five-year terms.
Medium-term loans are very versatile. They work well for companies that have a specific goal for their funding—whether that’s an advertising campaign or a new product launch. But they’re also ideal for less well-defined goals, such as business expansion.
How to Qualify
If your business has been operating for at least two years, generates over $100,000 in annual revenue, and your credit score is over 600, a medium-term loan might be a great commercial loan for your company.
To qualify for a bank loan, you need to be at the top end of these commercial loan requirements. Banks only work with the most qualified borrowers and profitable businesses. In exchange, they provide the lowest interest rates you’re likely to find in your loan search. However, bank loans also can take several weeks to fund.
Medium-term loans are slightly easier to qualify for, but not by much. You still need to have good credit and an established, revenue-producing business. Medium-term lenders work more quickly, funding loans in one to two weeks.
With a medium-term loan, you’ll have predictable monthly payments. That said, if your loan has a variable rate, it can change as market rates change.
Say you borrow $30,000 at a fixed 12% interest rate and need to pay it back over four years.
To pay back your loan, you’ll make fixed payments of about $790 over the entire life of the loan.
2. Short-Term Loans
- Loan Amount: $2,500 to $250,000
- Loan Term: Three to 18 months
- Loan Rates: Starting at 10%
With terms from three to 18 months, short-term commercial loans work well for business owners who have a small one-time expense, an emergency, or an unexpected business opportunity.
Lenders can process these loans very quickly—oftentimes the same day you apply—so they are ideal for situations where you need fast access to commercial lending. The online applications usually take just a few minutes to complete, and you can even upload any required paperwork online.
In addition, short-term lenders will work with newer companies and owners with lower credit scores.
However, fast cash and easier access come at a price: Short-term loans tend to have some of the highest interest rates around. The APRs start at 8.5% but can go all the way up to 80%.
A short-term lender also might quote the cost in different ways—sometimes as an interest rate and sometimes a factor rate. A factor rate is a multiple showing the cost of your loan. However, the lender quotes the total cost, always ask them to convert it to an APR to get the true cost of the commercial financing. This also allows you to better compare different types of commercial loans.
- The Business Backer
How to Qualify
Short-term financing is relatively easy to qualify for. The minimum personal credit score is 500. But if you’re a brand-new company you might have a hard time qualifying. Your business should be at least one year old and generating $50,000 in annual revenue.
With a short-term loan, you won’t be taking on debt for a long time—short-term loans are paid off quickly, often with daily or weekly payments.
You’ll make payments over a range of three to 18 months until you fully pay back the loan. The shorter the term on your loan, the larger your daily (or weekly) loan repayments will be.
Most short-term lenders set up automatic deductions from your business bank account to make sure you pay them back, although you can opt for manual payments as well.
Best Short-Term Loan Lenders
While these commercial loans can be expensive, you can compare several lenders make sure you find the lowest-interest-rate loan for your business.
3. SBA Loans
- Loan Amount: $5,000 to $13 million
- Loan Term: Five to 25 years
- Loan Rates: Starts at 5%
The Small Business Administration (SBA) doesn’t extend commercial loans themselves, but they partially guarantee SBA loans that banks and other financial institutions make to small business owners. The government guarantees that the lender will still get most of their money back even if the borrower defaults.
The government guarantee incentivizes lenders to make loans to small business owners, even those who don’t meet all the requirements for traditional term loans.
SBA loans are similar to traditional term loans but with longer terms and lower interest rates. But, don’t expect to have the money in your bank the next day. Just like regular bank term loans, SBA loans take a while to fund.
The SBA has three types of commercial lending programs: the SBA 7(a) program, the CDC/504 program, and the SBA microloan program. Each of these commercial loans have their own distinct terms and uses.
Let’s take a look at all three.
7(a) Loan Program
The 7(a) loan is the most common SBA loan for small businesses.
It’s also the most flexible type of commercial loan that the SBA offers—you can get up to $5 million in capital, and use it for virtually any business purpose. Most often, small business owners use the 7(a) to beef up working capital.
CDC/504 Loan Program
If you’re looking to purchase major fixed assets with your business funding, the CDC/504 program is your best bet. Loan amounts go up to $13 million and can be used to fund real estate, large equipment, and building purchases or upgrades.
Loans from the CDC/504 program are heavily regulated, but this means low interest rates and terms up to 25 years. These commercial lending options are great for business owners with proven track records and stellar credit scores.
With the microloan program, the name says it all—the SBA created these commercial loans to give credit access to new or especially small businesses that can’t meet most commercial loan requirements.
If you’re in need of a loan between $500 and $50,000, consider a small business loan from the SBA’s microloan program. Plus, you might be eligible for a microloan even if you have little-to-no credit history.
How to Qualify for an SBA Loan
SBA loans are easier to qualify for than traditional terms loans, but the bar is still high. You need to have strong credit and a profitable business to qualify for the 7(a) or 504 loan.
The microloan program has lower commercial loan requirements. You need to be able to demonstrate sufficient cash flow to afford the loan payments and have no recent bankruptcies or foreclosures. While good personal credit helps, sometimes business owners with spotty credit are still able to access small microloans.
SBA loans are long-term loans, with terms ranging from five to 25 years. The term depends largely on the purpose of the loan. Loans for buying real estate, for instance, usually have 25-year terms. Working capital loans have closer to seven-year terms.
Almost all SBA loans have monthly payments, making your loan easy to manage.
Again, the exact term on these commercial loans will depend on the loan program you’re working with.
Best SBA Loan Lenders
The SBA works with lenders across the country to offer SBA loans, and our guide to the best SBA lenders is a good jumping-off point. You can also contact your local bank to apply. Alternatively, you can apply with Fundera, and speed up the process of applying for SBA loans via our packaging services.
4. Equipment Loans
- Commercial Loan Amount: Up to 100% of the equipment value
- Commercial Loan Term: One to five years
- Current Commercial Loan Rates: 7% to 30%
For many businesses with a physical storefront, their biggest need is equipment. If you’re searching for commercial lending because you need to buy an expensive piece of equipment, a great commercial loan to consider is an equipment loan.
If you’ve ever taken out a car loan, you already know the basics of equipment financing. The vendor will supply you with the equipment you need, so you can start using it right away. The lender will finance it for you with convenient monthly payments, so you don’t have to pay the full cost upfront.
The best part about an equipment loan is that the equipment itself serves as collateral, so you don’t have to supply other collateral.
You can use equipment loans for almost any type of equipment, including restaurant equipment, manufacturing machinery, farm equipment, furniture, and computers. You can also finance vehicles with an equipment loan.
How to Qualify
Equipment loans are some of the easier commercial loans to qualify for because the equipment serves as collateral for the loan. If you default on the loan, the lender will still be able to sell off the equipment and get some of their money back. For that reason, most lenders care more about the type and condition of the equipment you plan to purchase than they do about you as a borrower.
The equipment, even if used, should be in relatively good condition. And sometimes, it helps you qualify if you work with a specialist lender. For instance, several lenders specialize in commercial truck financing while others specialize in semi-truck financing.
If you have low credit or low business revenues, the lender might require you to make a higher down payment. In other words, you won’t get 100% financing if you are not a strong borrower.
Some commercial lenders will extend equipment financing over a term that’s equal to the expected lifetime of the equipment you purchase.
However, some lenders will require you to pay back the equipment loan over a term of one to five years, with monthly repayments—much like you’d pay back a medium-term loan.
Some lenders structure their equipment financing as an equipment lease. This is similar to an equipment loan but sometimes comes with lower monthly payments—and, of course, means you won’t own the equipment.
5. Commercial Real Estate Loans
- Loan Amount: $200,000 to $20 million+
- Loan Term: 20 to 25 years
- Loan Rates: 5% to 30%
A commercial real estate loan helps you finance the purchase or upgrade of commercial properties, such as office space, warehouses, and manufacturing facilities. The properties can be very expensive, so most buyers of commercial real estate need a loan.
Similar to equipment financing, the property itself serves as the collateral for commercial real estate loans. That means the lender has a valuable asset to sell if the borrower defaults on the loan. Since the lender has more assurance of getting their money back, they charge relatively low interest rates on commercial real estate loans. Check out our commercial property loan calculator to learn more about the rates.
In addition, since commercial real estate is very pricey, the loan payments are spread out over a long period of time. The typical repayment term on commercial real estate loans is 20 or 25 years.
How to Qualify
Many types of lenders extend commercial real estate loans. Banks offer them to the most qualified borrowers for the most valuable properties. From a bank, you can get a traditional commercial real estate loan or an SBA CDC/504 loan. To qualify for a bank or SBA 504 loan, you need high credit and at least two to three years in business.
The next step down is hard-money commercial lenders, who work with less-qualified borrowers. You can get away with slightly lower credit scores, but the business should be generating revenue.
A new class of crowdfunding lenders has also popped up for commercial real estate lending. On crowdfunding platforms, dozens of investors pool their money together to fund your loan.
Typical Loan Amounts
LTV is a comparison of your loan amount to the current value of the property. ARV is a comparison of your loan amount to the post-renovation value of your property. ARV is used when you’re planning to use the loan to renovate a property.
Banks usually lend 80% LTV. That means, for instance, if your property is worth $400,000, your maximum loan will be $320,000. Hard-money lenders typically lend 50% to 70% ARV. For example, if the after-repair value of the property is $500,000, a hard-money lender will probably lend somewhere between $250,000 and $350,000.
SBA 504 loans range between $200,000 and $5.5 million.
Crowdfunding lenders usually fall somewhere in between hard-money lenders and banks in terms of loan size.
You pay back commercial real estate loans in monthly installments. Many commercial real estate loans have fixed interest rates, so your monthly payments are the same over the life of the loan.
Specialized types of commercial real estate loans, such as bridge loans, have balloon payments at the end. This means you make low monthly payments or interest-only payments until the loan’s maturity date, at which point you have to pay the remaining balance in a single payment.
6. Business Lines of Credit
- Loan Amount: $5,000 to $1 million
- Loan Term: Six months to five years
- Loan Rates: 7% to 25%
If you’re looking for commercial loans with flexibility, a business line of credit might be a great option for your small business. A business line of credit is not like a traditional loan, but you’re still borrowing money. Banks and online lenders issue lines of credit.
Think of a business line of credit as a more powerful credit card: A lender gives you access to a pool of money that you can draw on whenever you need to. You only pay interest on the funds you take out. Once you repay the lender, your pool of money goes back up to its original amount, without you having to reapply for the loan.
The main advantage of a business line of credit is its flexibility. You can withdraw and repay whenever you want to, so it’s a good backup source of funding to cover unexpected expenses. And you only pay interest on what you use.
- Credit Junction
How to Qualify
Though it’s not an industry standard to separate the two, sometimes it’s easier to designate traditional lines of credit and short-term lines of credit. Banks issue traditional lines of credit, and online lenders issue short-term lines of credit.
A bank line of credit is as difficult to qualify for (or even harder) than a traditional term loan. You should have a credit score over 700, and your business should be profitable and have a solid business history.
With a line of credit from a commercial lender, you’ll need at least a 630 credit score and one year of business history on the books.
In almost all cases, a business line of credit is a revolving line of credit.
When you draw from the credit line, you’ll have to repay the amount you drew (plus interest) with daily, weekly, or monthly repayments (depending on the commercial lender you have the line of credit with).
But once you repay the amount you drew, your credit line resets back to its original amount—that’s why a line of credit is “revolving.”
Best Business Line of Credit Lenders
If you think you’ll qualify for a bank line of credit, you can visit your local bank. However, if your credit isn’t great or if you just money quickly, consider applying online. Several lenders offer business lines of credit online, including:
7. Merchant Cash Advances
- Loan Amount: $5,000 to $250,000
- Loan Term: Repayment deducted from your credit card sales
- Loan Rates: 15% to 110%
A merchant cash advance gives you a lump sum loan that you pay back by giving the lender a percentage of your daily credit card sales. The lender keeps taking a cut from your sales until you’ve paid the debt back in full.
Merchant cash advances are a fast and easy way to access capital for your business. And they provide the flexibility small business owners like.
Not making as many sales one week? The lender gets a smaller slice from your daily credit card sales. However, if you’re having a successful week, the lender takes a large cut from those sales, and you won’t see as much cash in the bank.
But, there’s a big disadvantage to merchant cash advances: their cost. MCAs are probably the most expensive commercial lending options on the market.
Merchant cash advance lenders use “factor rates” instead of interest rates to quote cost. But the best way to understand the cost of this commercial loan is in terms of the APR—merchant cash advance APRs range from 15% to 110% APR or more.
If you have a less-than-ideal credit rating and no collateral to offer, a merchant cash advance can be a good short-term way to finance your business. But because they’re so expensive, it’s crucial that you compare your options before you take on this kind of expensive debt.
How to Qualify
Qualification standards for an MCA are lax. You’ll need a credit score of just 550 and two years of business history. Most lenders who are approved have annual revenue upward of $180,000 per year.
Commercial Financing: Your Next Steps
Do any of these commercial lending options seem like the right fit for your small business?
Before you jump into the commercial loan application process, take a step back and ask yourself which options are right for you—given your business’s financial position, stage of growth, and your immediate and future goals.
In most cases, the right options for you will sync up with what you qualify for. If you have a strong credit profile and a highly profitable business, for instance, a bank loan or bank line of credit will make the most sense and save you the most money in the long run.
In other situations, your loan use will point you in the right direction. If you’re buying equipment, for example, an equipment loan naturally makes the most sense.
The other part of the equation is what you’re eligible for. You don’t want to waste time applying for something that’s completely out of reach for you, so check the aforementioned loan requirements for whatever type of commercial loan you’re seeking.
Once you know what you can qualify for, you’ll want to gather the right documentation so that the loan application process is seamless.
Commercial Loan Documentation
Commercial lenders vary in terms of how much paperwork they’ll require from you. Banks and medium-term lenders typically require more paperwork—sometimes all of the documents we list below. Short-term lenders and merchant cash advance providers might ask for just one or two of these documents.
Almost every lender will ask to see recent bank statements, your last couple years of tax returns, the loan purpose, and your time in business.
Here’s a complete list of documents you might need to apply for a commercial loan:
- Recent bank statements
- Balance sheet
- Profit and loss statement
- Personal and business tax returns
- Basic personal information (SSN, monthly income, residential address, etc.)
- Basic business information (tax ID, address, number of employees, etc.)
- Time in business
- Use of loan
- Business plan (particularly for new businesses)
- Business debt schedule
- Collateral documentation
- Cash flow forecast
If you have these basic documents ready, you’re well on your way to securing a commercial loan for your business. Note that lenders will also check your credit report, but that’s not something you have to provide. They will be able to access it from your social security number.
Be prepared before you start searching for commercial loans, and you’ll find the entire process—searching, evaluating, applying, and qualifying—a lot easier.
Frequently Asked Questions
The Bottom Line
If you’ve gotten this far, you should have a better understanding of all the commercial loan options available to you, and exactly how to qualify for them.
The next step is to dig into your business’s financials and see what you can qualify for. With any luck, you’ll be able to qualify for a bank loan or even a loan guaranteed by the SBA. But if you can’t, don’t worry. There are plenty of great options available to you via commercial lenders.