What You Need to Know Before Taking Out a Commercial Loan
Commercial loans are loans arranged between a bank and a business. These loans are generally short-term, but the bank may permit loan renewal and extension if necessary.
Commercial loans serve many functions. Companies employ them to expand their facilities, tap new markets, purchase equipment or real estate, pay down debt, fund working capitol, and make acquisitions.
When it comes to commercial business loans, there is no one-size-fits-all. That is why a customized approach to commercial lending is imperative. There is a big difference between the needs of a promising start-up seeking debt financing as opposed to a seasoned company purchasing another business.
Before starting the commercial business loan process, some basic due diligence is needed. Look into the various types of loans available, so you can determine which one is most appropriate for your business.
What are the different types of commercial loans?
Traditional Term Loan
For many small businesses, a traditional term loan fills the bill. The advantage of this loan is that you have a fixed monthly payment for the specific term of the loan. Term loans are often used to finance the purchase of equipment.
Small Business Administration Loans (SBA Loans)
Small Business Administration (SBA) loans are another option. Not only can an SBA loan offer better terms than other commercial loans, but it is partly guaranteed by the federal government. These loans are not made directly by the SBA but are offered by SBA-guaranteed lenders. Because of this partial guarantee, the lender is more protected and can offer bigger incentives, such as lower interest rates and longer terms. The SBA loan process, however, is quite complicated.
Real Estate Loans
Purchasing property for your business requires obtaining a commercial real estate loan. Down payments on commercial real estate loans are larger than those for residential properties and may range from 15 to 35 percent of the purchase price. Repayment terms are shorter, generally ranging between five and 20 years. Unlike most residential real estate loans, there are generally prepayment penalties in place if paying the loan off early.
Business Line of Credit
A business line of credit allows you to borrow up to a certain amount, but pay interest only on the amount you are actually using. For example, if your business line of credit is $100,000, but you are only using $50,000, that is the amount on which interest is charged. A business line of credit is among the most flexible types of loans and is often used to support growth and for general working capital needs.
Commercial Loan Considerations
Before taking out a commercial business loan, it is vital to consider carefully the reason your company seeks this funding. This is what banks call "identifying the borrowing cause". (What caused the need to borrow? How long will the borrowed funds be needed?) A loan simply to stay afloat is not feasible unless you can prove that business will grow significantly in the near future. The commercial lender is going to want a precise answer when asking why you want a loan, and you must present it in straightforward terms.
The typical reasons for taking out a commercial loan include starting a business, expanding it and managing ordinary expenses. There is nothing wrong with taking out a loan to maintain a safety cushion, but whatever the reason for the loan, comprehensive information is required.
A collateral loan, also known as a secured loan, is used to protect lenders in case you default on your payments. Collateral can classify as something you own, such as properties, vehicles or even savings.
While commercial lenders do not require collateral for every loans, they must protect their interests and collateral is common. What this collateral consists of depends on the individual business. While real estate is the most frequently used type of collateral, other property owned by the business may also prove acceptable.
If your business has no track record or credit rating to speak of, that does not necessarily mean they will not receive a commercial mortgage loan. However, the owners may have to guarantee the loan with their personal assets. Should the owners default on the loan, the commercial lender can then recover the funds from them. There are no programs analogous to that of FHA or VA loans in residential mortgages for commercial lenders. There is also no such thing as private mortgage insurance, so lenders depend on the property as security if a default occurs.
Commercial Lending Rates
When it comes to commercial mortgage lending rates, expect them to prove between 1 and 2.5 percent higher than residential mortgage rates. Needless to say, you want the best commercial lending rate available. Much depends on your credit history, the nature of the business, the amount of collateral and loan features.
Commercial Loan Tips
When filling out the application, accuracy, and documentation is essential. Inaccurate information is the best route for loan denial. Include all relevant financial information, and show proof of loan repayment ability. The latter may include your revenue projections, cash flow, tax returns, and bank statements. A solid, detailed business plan is an absolute necessity. It goes without saying that you should have good credit and a record of paying obligations on time.
If your documentation appears disorganized, hire an accountant beforehand to go over it and ensure everything is in place before you submit the loan application.
Do not apply for more than one commercial loan at a time. That is because the lender checks your credit score, and the checking itself may cause the score to drop a few points. Apply for several loans in succession and the various lenders checking your score could end up dropping it significantly. Apply for the loan you find that best meets your requirements and that you are most likely to receive.
How Texas Security Bank Can Help
At Texas Security Bank, we pride ourselves on providing the right commercial loans for our customer’s needs. We offer loan flexibility based on the individual business. A seasonal business will need different options than one with steady cash flow. We tailor loans for each client, after delving into the business’ operations and goals. Whether your business seeks financing for new equipment, new property, working capital or other forms of expansion, Texas Security Bank is here for you. Contact us today and arrange a consultation.
In addition to providing commercial loans, Texas Security Bank also seeks to add value for the independent business owners by providing executive education and business owner education through the TSB Academy and TSB Speaker Series as part of its mission of Elevating the Champions of Free Enterprise. We know that for the business owner, knowledge is power. Check out the Business Education section of our website for more details.