Commercial financing: All you need to know

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    Chris Godfrey

    Page written by Chris Godfrey. Last reviewed on March 21, 2024. Next review due October 1, 2025.

    If you own or run a business you’ve probably heard the term ‘commercial financing’ before. But what does it mean, how does it work and is it right for your business? Well, wonder no more. Read on to find out all you need to know about commercial financing – and how you can make the most of it.

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      What is commercial financing?

      Commercial financing comes in many shapes and sizes, ranging from term loans and revolving lines of credit to business mortgages, equipment loans, cash advances and more:

      Term loans

      The most common type of commercial loan and typically used for one-off investments where you know exactly how much cash you need. Bulk materials or inventory purchases, plant and equipment investment, and debt repayment and restructuring activities work well with this kind of term loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required.

      Business line of credit

      This business loan functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. With a line of credit, interest rates are usually fixed, and businesses may repay on a set or flexible schedule. Collateral may be required.

      Commercial real estate loans

      Commercial real estate loans (also known as commercial mortgages) are used to buy properties that have a business function. This would include income-producing properties such as factories, offices, stores, restaurants, gas stations, gyms, theatres, sporting venues, etc. Although commercial real estate loans are similar to the residential mortgages used to buy homes, they differ in some key areas:

      Differences between commercial and residential real estate loans

      CommercialResidential
      Primary borrowerBusiness entityPrivate individual
      Type of propertyCommercial propertyPrivate residence
      Loan repayment period10 to 25 years15, 20 or 30 years
      Maximum loan to value (LTV)65% to 85% LTV95% LTV
      Interest ratesHigher than residentialLower than commercial
      FeesHigher than residentialLower than commercial
      Pre-payment penaltiesCommonRare
      Minimum FICO scoreUsually 600+Can be as low as 500

      Commercial construction loans

      Commercial construction loans are short-term funding instruments used to pay for building new income-producing properties or for the expansion, refurbishment or conversion of existing commercial properties. This type of loan typically pays out in instalments as each phase of the work is completed rather than all at once like a commercial mortgage. The loan is paid back when construction is complete, often by converting the debt to a less expensive commercial real estate loan. 

      Invoice financing

      Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organizations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised.  Your invoices act as security for the loan, no added collateral required.

      Equipment financing

      Buying big ticket machinery and equipment can put a major dent in your cashflow, but equipment loans can pay for your new plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage – so no added collateral is required. You use the equipment as you pay for it and the lender maintains a lien on the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. 

      Merchant cash advance

      Available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the merchant cash advance back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

      Revenue-based financing

      Revenue-based financing functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral is required.

      SBA Loans

      There are many types of SBA loan, but for small and medium-sized businesses, regular SBA 7a loans, SBA express loans and SBA microloans may be the best fit. 

      • SBA 7a loans

      SBA 7a business loans are backed by the US Government up to 85% of loan value and can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Government backing reduces risk for the banks, credit unions and online lenders who offer these loans meaning the funds usually come with much lower interest rates and fees than other commercial lending, However, meeting the SBA’s strict rules of eligibility can be tough. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal credit score must be at least 680. Collateral may be required.

      • SBA express loan

      SBA express loans are a faster alternative to the standard 7a loan program. Offered by the same pool of lenders, express loans can give SMEs up to $500,000 to support their business and you will usually get a ‘yes/no’ indication within 36 hours of making your application. Note that SBA express loans are only 50% backed by the US Government, so lenders carry more risk. This means interest rates and fees are higher with express loans than their 7a counterparts. Collateral may be required.

      • SBA microloans 

      Nonprofit and community-based lenders can provide SBA Microloans to borrowers that may struggle to secure standard business financing. Available up to $50,000, these loans can be ideal for entrepreneurs who are seeking a smaller sum to start or grow their business. SBA microloans also come with more relaxed qualifying rules and can usually be secured with FICO scores as low as 500, or even with no credit score at all. However, applicants should be aware that these types of loan often require collateral to secure the debt or a personal guarantee that makes you personally responsible for the loan. 

      Inventory financing

      Inventory financing can come as a short-term loan, or a revolving line of credit and it is used to buy products that a business will sell at a later date. This type of funding allows businesses to pay for the stock that they must hold in warehouse, but which will take time to sell. Financing can reduce pressure on the organization’s cashflow and allow them to buy products in bulk to gain a discounted price. It is also particularly useful for businesses that have large seasonal trade swings. The loan is usually paid back in regular instalments and must be cleared before a new round of financing can begin. The products act as collateral for the loan, no added security is required.

      Will I need to offer collateral for commercial financing?

      Possibly. Lenders like to know they can get their money back if things go wrong. Depending on the strength of your credit, the type and size of the loan and what the funds are being used for you may have to provide security for the loan. Typically, this means real estate or some other hard or liquid asset that the lender can sell to recover their funds if the worst should happen. 

      If you don’t have sufficient collateral yourself, you could ask a cosigner with good credit and who has real estate or other assets to join the deal. Most lenders will want collateral to the full value of the loan and will usually consider provided assets at less than general market rates – known as the ‘distress value’ – as they may need to sell the assets quickly to recover their funds.

      How can I apply for commercial financing?

      You can improve your chances of getting approved for commercial financing by preparing in advance. Key tasks to take care of include:

      • Identify your need for the loan. Why do you need the money? You must present a strong case for funding to secure a commercial loan and your financial records must support this need, indicating how the loan will deliver your plan – and critically, how you will pay the loan back. 
      • Check your personal and business credit scores. It is common for mistakes to occur on credit reports and incorrect information could have an adverse impact on your loan application. Note that business credit scores are usually graded from 1 to 100 and are different than personal FICO scores. A good business credit score is 80+ and a good FICO score is 680+. Additionally, not all organizations will have a business credit score, in which case, the lender will scrutinize your personal credit report. Ensure it is correct. If there are errors, get them fixed before applying for your loan – and be aware that fixing a credit score can take time and there are no ‘fast credit repairs’ despite the many promises from online ‘credit doctors’ who say they can perform miracles for your score.
      • Get your paperwork in order. Lenders will need to see bank statements (at least 18 months), balance sheet, profit and loss statements, cashflow projections, list of debts, list of assets, customer database, documents that reveal the structure of your business (corporation, LLC, etc.), certificates of good standing, tax returns and more. 
      • Build a good business plan and pitch. This goes back to your need for the loan. Depending on how much you are asking for, lenders will expect a detailed and insightful business plan that explains why you need the funds and what they will do for your business once you have them. Business plans should do more than paint a rosy picture – explain the risks involved, what the downsides could be – and how you intend to overcome them. If you cannot produce a business plan yourself, it may be worth paying an external service to do this for you. 
      • Research and compare lender programs: Interest rates and fees for commercial loans can vary significantly, so it makes sense to shop around before settling on a lender. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of commercial loan deals from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for business owners who have never taken out a commercial loan before.

      How Swoop can help

      No matter if you’re seeking your first commercial loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for commercial financing. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality commercial loans from a choice of lenders. Give your organization the financial boost it deserves. Register with Swoop today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

      To read our editorial policy, please click here.

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