Commercial Loan

Key takeaways
* A commercial loan is debt financing provided by a bank or lender to a business to fund operations, capital expenditures, or growth.
* Many commercial loans require collateral (property, equipment, or accounts receivable) and strong documentation of cash flow.
* Terms vary from short-term to renewable facilities; interest is typically tied to a benchmark rate.
* Small businesses can access government-backed (SBA) loans with partial guarantees from the U.S. Small Business Administration.

What is a commercial loan?
A commercial loan is a lending arrangement between a financial institution and a business. It provides funds to cover operating expenses, purchase equipment, acquire property, or finance other business needs when owners cannot or do not want to use equity markets.

How commercial loans work
* Purpose: Short-term working capital (payroll, supplies), equipment purchases, and commercial real estate financing are common uses.
* Collateral: Lenders often require collateral—real estate, machinery, inventory, or future accounts receivable—to secure repayment. In default, the lender can seize collateral.
* Repayment and interest: Loans carry scheduled payments and interest, often linked to the prime rate or another benchmark. Lenders may require regular financial reporting and insurance on financed assets.
* Renewal: Some loans are non-revolving, while others can be rolled or renewed to extend financing beyond the original term.

Special considerations for borrowers
* Creditworthiness: Lenders evaluate the business’s and, sometimes, owners’ credit histories.
* Financial documentation: Expect to present balance sheets, profit-and-loss statements, cash-flow forecasts, and a business plan.
* Personal guarantees: Lenders may require owners or officers to personally guarantee repayment.
* Covenants and monitoring: Loans may include covenants that require ongoing financial reporting and limit certain business activities.

Common types of commercial loans
* Term loans: Lump-sum loans repaid over a fixed period with regular payments; used for equipment or expansion.
* Lines of credit: Revolving credit that a business can draw from as needed, similar to a credit card.
* Commercial mortgages: Loans secured by commercial real estate for purchasing or refinancing property.
* Equipment loans: Financing specifically for machinery and equipment; the purchased asset often serves as collateral.
* Mini-perm loans: Short-term commercial real estate loans (typically three to five years) used until longer-term financing is obtained.
* Renewable/rolled loans: Loans that can be renewed or extended to provide ongoing short-term funding.
* SBA-guaranteed loans: Loans issued by lenders and partially guaranteed by the Small Business Administration to reduce lender risk (guarantee levels vary by program and loan size).

What lenders typically require
* Strong, verifiable cash flow and positive financial statements.
* Business and personal credit histories.
* Collateral adequate to secure the loan.
* A clear business plan demonstrating the project’s feasibility.
* Sometimes, personal guarantees from owners or officers.

SBA loans (overview)
The Small Business Administration provides partial guarantees for certain small business loans to improve access to capital. SBA-guaranteed loans can support larger loan amounts and often have favorable terms, but lenders must follow SBA standards for due diligence, collateral, and underwriting.

Loan vs. line of credit (quick comparison)
* Loan: Non-revolving; borrower receives funds up front and repays on a set schedule.
* Line of credit: Revolving; borrower can draw repeatedly up to the credit limit and pay interest only on amounts used.

Bottom line
Commercial loans are a primary source of financing for businesses of all sizes. Understanding the types of loans, lender expectations, collateral requirements, and potential need for guarantees helps businesses choose the right financing and prepare a stronger application.