Commercial loans are a significant part of the national economy. When businesses need to grow, financing often comes in to cover costs of property, equipment and even working capital. But because many small business and mid-sized owners are frugal and often conservative in their borrowing habits, when it’s time to find a loan for a small business, many business owners are unsure where to start.
There are many types of commercial loans and lenders. It’s not always easy to sort through the financial jargon and decipher the bottom line. This article will give a broad overview of commercial loans and lenders to give you a starting point. To narrow your focus to just the loans that fit your business, talk with a loan broker.
Not sure what a loan broker does? You’ll find the answer to that here too. So, let’s jump right in.
Loan Types
When you’re looking for a small business loan, you should have a clear vision for the use of funds and potential return on investment. So, it’s better to address the topic of loan types by starting with how you use them. Matching the right type of loan to your business purpose is critical. You don’t need to leverage your vehicles and property to purchase equipment if you can be approved for an equipment loan that is secured against the assets you purchase, for example. Let’s look at a few common needs and match those up with the loans that solve them.
Real Estate
Buying real estate is one of the highest expenses you’re likely to face as a business owner. That’s why it’s so common for businesses to seek real estate loans. There can also be tax advantages to borrowing, even when paying for the property upfront is possible. Real estate loans break down into two main categories: short and long-term loans. If you need a short-term real estate loan, look for term, bridge, and hard money loans. When a commercial mortgage is what you’re after, opt for a conventional CRE mortgage or an SBA loan.
Equipment
As with real estate, the type of equipment financing you’ll need depends on how long you plan to have the equipment. If you use equipment with a short useful life expectancy or equipment that requires frequent upgrades, try an equipment lease, term loan, or line of credit. A hard money loan, SBA equipment loan, or bridge loan can handle long-term equipment needs with a useful life expectancy of five or more years.
Working Capital
Working capital is what every business needs for its daily operations. As such, it’s not always easy to tie it to an individual purpose. You can use one working capital loan to cover utilities, payroll, office furniture, or renovations. So, to get financing that fits the bill, look at lines of credit, SBA 7a loans, term loans, and factoring.
Construction
Construction loans aren’t structured like most other loans. They pay out in increments based on construction milestones. This schedule protects the lender and the borrower if anything goes wrong and the project has to be scrapped, or if materials or labor costs rise. Most construction loans only require interest payments while construction is ongoing. The loan principal is paid at the end of the loan term. Lenders for construction financing include banks, private lenders, the USDA, and the SBA.
Refinancing
Refinancing and restructuring are often confused. The difference is that restructuring changes the terms of an existing loan. Refinancing is replacing one loan with another, lower interest rate loan. Private lenders, the SBA, and commercial banks offer refinancing options.
Types of Lenders
Once you’ve nailed down the loan that matches your business purpose, the next step is to find a lender that offers it. You’ll also want to consider how quickly you need the loan and how you’ll qualify for it. Banks and credit unions tend to be better for long-term loans but have stricter qualification criteria. Private lenders can offer funds quickly but may charge higher interest rates for the service.
Banks
Generally, banks offer long-term loans like commercial mortgages. Since they’re backed by federal funds, banks have strict underwriting requirements. If you have a strong credit score and can afford to wait several weeks for approval, a bank might be the right choice for your loan. A bank may have more advanced technical services but higher fees.
Credit Unions
While banks are owned by their investors, credit unions are owned by their members. When you take a loan through a credit union, you become a member, which means you have a vote in how the organization is run. Fees are lower, but a credit union might have a limited service area.
Private Lenders
Private lenders aren’t affiliated with a bank or credit union. They’re individuals, groups, or companies that loan money for profit. Since they set their own terms (subject to legal limits), it can be easier to qualify for a loan through a private lender than through a bank. You may, however, pay higher fees.
SBA-Backed Funds
The Small Business Association is a federal agency that backs loans for small businesses. The association isn’t a direct lender. Instead, it backs loans as a co-signer would. That makes the lender feel more secure and more likely to offer the loan. They know the SBA will guarantee the funds if the borrower defaults on the loan.
Equity Investors
Like private lenders, equity investors are for-profit individuals, firms, or groups that provide a business with money. Unlike private lenders, however, an equity investor will want a stake in the company itself. For example, an equity investor may provide capital to start a business in exchange for a percentage share of the profits.
Loan Brokers
The easiest and fastest way to sort through your loan options is by using a loan broker. Loan brokers are essentially matchmakers between borrowers and lenders. They don’t work for any one lender, so they don’t have a stake in which lender you choose. That means you can compare across different loans and lenders. First, a broker will assess your business scenario, funding need, and objectives. It helps you both determine which loan type is the best for your business. Then, the broker will pursue the right lenders to get you the best deal possible. Most brokers will have built professional relationships with lenders to get deals you can’t access through the lender directly. Additionally, the broker can help you line up any supporting documents so your application has a better chance of success. Brokers are familiar with what lenders require and how you can show the best side of your business. If your business isn’t where it needs to be credit-wise, a broker can show you how to up your credit score. That might involve refinancing to pay off debt faster, identifying which debts to pay off first, and finding places to cut your expenses. In the end, finding a loan takes work, but that work is made far easier when you have help from a professional broker. We’ll assess your business based on your objectives to help you find the right financing type and the right lender. Don’t waste valuable time running from one lender to another, trying to sort through their lending criteria. Get helpful advice and guidance all from one place and get back to running your business.
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