The Pros and Cons of Commercial Business Loans
In fact, 26 percent of business owners who have tried and failed to obtain business funding gave up on hiring or expanding because they didn’t have the cash to do it, according to the Small Business American Dream Gap Report.
However, with a commercial business loan, small business owners can receive the cash they need to make purchases such as:
- Opening another location
- Hiring new employees
- Investing in new equipment
- Purchasing new inventory
Still, a commercial business loan isn’t the right loan option for every small business owner. In this post, we’ll cover the pros and cons of these loans to help you make a well-informed decision.
What Are The Pros and Cons of Commercial Business Loans?
The Pros of Commercial Business Loans:
1. Provides a Cash Flow Boost
According to the National Federation of Independent Business (NFIB), the top cash flow struggle for small business owners is irregular revenue streams.
With this type of small business loan, though, irregular revenue streams don’t have to be an issue. A business commercial loan provides the cash injection that you need to invest in new equipment, meet payroll, or afford any other business expenses that you don’t have cash on hand for.
If your business operates in a highly seasonal industry or has long payment cycles, a commercial business loan makes it possible to grow your business all year round. Often, business owners struggle to make ends meet in these circumstances, but with commercial financing you can ensure you have ample cash flow.
2. Maintain Business Ownership
In the short-term, selling shares of equity in your company to raise money may seem inexpensive compared to a commercial business loan. However, this funding method carries a different kind of expense.
Many small business owners have found themselves on the outside looking in on their own company after raising funding through equity. By pursuing a commercial business loan, your business will remain owner occupied, instead of having investors or board members making the decisions for you. You’ll still receive additional working capital but you won’t lose control of your business that you’ve worked so hard to build.
3. Access to Large Sums Of Money
Small business owners often don’t have the financial capability to raise funding in the debt or equity markets. Nor do they typically have the contacts to raise funding through venture capitalists. This can make starting a business extremely expensive and risky. However, with a commercial business loan, it’s possible to cover all your startup expenses with just one loan.
This also makes it significantly less daunting for business owners without extensive resources to obtain a relatively large amount of funding. Plus, by consolidating all your financing on one loan, you’ll keep things simple.
The Cons of Commercial Business Loans
1. Extensive Paperwork and Loan Application Process
Since financial institutions extend commercial financing based on your company’s ability to pay, they’ll require extensive paperwork.
According to the Small Business Chronicle, when applying for a commercial business loan, you’ll have to be prepared to provide “two or three years of tax returns, financial statements, accounts receivable and accounts payable documents.”
In addition, you might have to give a brief presentation to explain your business goals and objectives. It’s also a good idea to have a general outline of your short and long term business plan.
The commercial lender will use these documents and your presentation to decide if you qualify for their financing. If you qualify, they’ll then use this information to determine your loan amount.
2. Lack of Flexibility
With a commercial business loan, you’ll need to have a clear picture of what you’ll use the money for and how you plan to pay it back. Unlike business financing options such as a merchant cash advance, business line of credit, or equipment loan, the terms of a commercial business loan aren’t flexible.
Instead, you’ll borrow a set amount of money, make regular monthly payments, and will be expected to repay the loan in an agreed upon term.
If your small business has fluctuating revenues, a required monthly payment may not be desirable. Additionally, if you’re not sure exactly how much cash you need, a commercial business loan may be too much, and if interest rates are high you may end up paying interest on money you don’t need.
3. Risk of Default
No business loan is risk-free, which is why you should weigh the risks of defaulting on a commercial business loan. Commercial business loans may be secured or unsecured.
If your loan is secured, defaulting on your loan could mean losing valuable assets. Even if the loan is unsecured, you run the risk of being taken to court by your lender. At the very least, defaulting on your loan (or even making late payments) will negatively impact your business credit score. In some cases, it could also impact your personal credit score.
Conclusion: Determine if This is the Right Type of Business Financing for You
If your business is generating regular revenue, but you still need additional working capital to grow, a commercial business loan is something to consider.
If you’re able to qualify for this type of loan, you’ll need to determine what kind of commercial business loan is right for your business. Short-term loans may help even out cash flow, but large, longer-term loans could allow you to grow your annual revenue for years to come.
As with any financial decision, carefully weigh your business’s needs, your desire for growth, and tolerance for risk before applying for a commercial business loan.
In addition, it may be beneficial to research and compare this type of loan to other financing options such as Small Business Administration (SBA) loans, loans from alternative lenders, business credit cards, and cash advances.
Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2021.
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.