The Truth About Commercial Business Loans

Like any other loan, commercial business loans are exchanges between borrowers and lenders. Commercial business loans are unique in that they are used for business, as opposed to personal, purposes. Banks commonly give commercial business loans and there is usually no need to go elsewhere.

The Process

The first step in obtaining any term commercial business loan is submitting a loan application to a loan officer. The loan officer will check over your credit reports, your accessible collateral, and your income. Under certain circumstances, you may have to give the loan officer personal financial statements. If you are submitting for a long-term commercial business loan, you will need to supply the loan officer with more information. Within five days of submitting your commercial loan package, you will receive a letter which is meant to ensure the terms between you, the borrower, and your lender. Once you receive this letter, it is up to you to choose the best commercial business loan offer.

Types of Commercial Business Loans

There are three different types of commercial business loans that correspond to different businesses and businesses' needs.

  1. Short-Term
    Short-term commercial business loans provide businesses with money to cover excess demand over a season or period. Because the time allowed on short term business loan is quick, the risk is low and these loans can either be secured or unsecured. This type of loan is most often used for businesses in the manufacturing, retailing, distribution, or service sectors. Once the immediate needs are met, usually anywhere from three months to one year, the loan is repaid with the profits made through utilization of the loan.

  2. Term-Loan
    Term-loans last over an intermediate period of time, usually one to five years. Due to the longer duration, the risk on term-loans is higher and therefore they must be secured. They are used for businesses that require an increase in capital in order to produce a product. Term loans are paid back when the product created with the loan produces a profit. An example of a typical term-loan would be to an agricultural business that required equipment and crops. The loan would be used to buy machinery, plants, and whatever other inputs are needed to create growth. Once the crops matured and were harvested and sold, the loan could be paid back.

  3. Long-Term
    Long-term commercial business loans are used by companies that are just starting out or need to expand and want to obtain mortgage loans. They are issued over time periods greater than five years and usually closer to twenty years. Long-term commercial business loans are a trade off between the borrower and the lender. The borrower obtains the loan and, in exchange, the lender receives shares of the company. Sometimes the shares can be in the form of equity or actual ownership in the firm.