What is a Business Commercial Loan?
While many large businesses use equity markets to finance their operations, for most small businesses, going “public” isn’t realistic. Fortunately, for many small businesses, securing a commercial loan can be a viable option.
With a commercial loan, a small business will be lent a predetermined amount of funds from a financial institution with the promise to pay them back in the future. Typically, commercial loans are a short-term source of financing that is used for operational costs that a business otherwise wouldn’t be able to afford.
How to Use a Commercial Loan
There are many reasons that business owners apply for commercial loans. One of the most common reasons is the need to resolve gaps in the business’s cash flow. If your company has expenses that need to be paid before you can accrue the revenue needed to pay them, the funds from a commercial loan will come in handy.
Another common reason that business owners apply for commercial loans is to invest in property, plants, and equipment. For example, if a business wants to open a second location or update equipment, having a commercial loan can allow them to finance these projects.
Ultimately, if you believe that further investing in your business can earn you more money than the total cost of the loan (principal and interest) over time, then securing a business loan can be incredibly useful.
Industries that Benefit from Commercial Loans
Because commercial loans can be used for a variety of purposes, there are many industries that can utilize them.
- Franchises that are looking to rapidly expand.
- Commercial enterprises that want to locate to another store or remodel.
- Manufacturers that need to purchase better, larger, or newer sets of equipment.
- Financial enterprises that can generate a greater return on investment than the interest rate on the loan.
- Tech companies that want to improve their infrastructure.
- Credit-based businesses that are experiencing temporary cash flow issues.
How to Apply For a Commercial Loan
Not every business that applies for a commercial loan will be eligible to receive one. However, the application process is relatively straightforward.
- Begin by organizing the necessary paperwork. This can include relevant financial statements, a detailed business plan, and a calculation of the loan you are applying for. Depending on your business’s industry, your personal credit history may be required as well.
- Create a presentation that clearly explains why your business will benefit from a loan and why you’ll be able to repay the loan. You should also prepare an executive summary.
- Contact potential commercial loan lenders and make an appointment to give a presentation (if possible). Remember, even if one lender says no, another may say yes to the same presentation.
Preparing for a commercial loan requires hard work, but once you secure the financing you need, you’ll be glad you put in the effort.
When comparing loan options, there are a few components to consider. The loan’s interest rate will dictate how much you’ll need to pay in the future to receive funding in the present. In addition, the loan terms will be important, and you’ll want to consider when your future payments are due and how they’ll be structured.
Securing a commercial loan for your small business can be incredibly useful, but that doesn’t mean they don’t have any risks. If you’re going to justify assuming debt for your business, then you’re going to need to earn a return on investment that is greater than the cost of capital. With a solid business plan and an understanding of the commercial loan industry, your business can be better prepared for the future.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.