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What Should I Know Before Applying for a Commercial Loan?

If you are looking to expand and grow your business, you will likely have to rely on a commercial loan for a good portion of your funding—whether it’s to purchase property, pay down debt, finance new projects, or a wealth of other reasons. Banks issue commercial loans to help fund business activity

Different types of businesses have different needs, so commercial loans should be flexible enough to accommodate a variety of goals. For example, a tech firm might have a different set of objectives than a restaurant. 

No matter what kind of business you own, here are some important things to know before applying for a commercial loan. 

Lending criteria:  

Finances

Banks and lenders want to be sure that your business is in a stable financial position. Every business takes on its own risks and has its own expenses. Typically, a bank will review your financial statements, calculate your debt-to-asset ratio, and assess your cash flow. Arguably, the most important factor is whether you have the cash flow to pay back the loan. 

Credit Score

Lenders also consider your business credit. The minimum score most lenders will accept to issue an SBA loan is a 155 on the FICO Small Business Scoring Service. However, there are circumstances in which you can get a loan with a lower score. If your personal credit score is low, then you may have difficulty getting a loan. 

Personal Finances

Most small businesses are owned by a small handful of people, and banks will usually look at the owners’ personal finances. That type of financial information can include personal credit score, borrowing history, defaults, and tax liens.

Property Features

If you’re using a commercial loan to purchase or lease property, then lenders will look at the features of that property. Properties allowed for commercial loans include warehouses, storefronts, labs, and retail spaces. Typically, the property itself will act as collateral, and most commercial loans have a loan-to-value (LTV) ratio of 65% to 80%. 

What Types of Documentation Do I Need to Apply?

The commercial loan process can be complex, and often requires a large amount of documentation. At the very least, you’ll need the following

  • Books, financial records, and reports
  • 6-12 months of bank statements
  • Property appraisals
  • Business plan
  • Business tax returns

Depending on the lender, you may need to provide additional information, such as property records and other financial disclosures. Make sure that you understand what documents you will need to bring with you. 

Loan Types 

Commercial banks generally offer three major kinds of loans:

Term Loans

Term loans have a fixed monthly payment and a specific loan term. Usually, businesses use these kinds of loans to finance equipment purchases. 

Lines of Credit

SBA Loans

You can also apply for a Small Business Administration (SBA) loan. SBA loans usually have better rates than traditional loans, and the government guarantees up to 75% of the loan, so banks are less concerned with the risk of defaults. These kinds of protections mean that SBA-partner lenders can offer better loan terms. 

Keep in mind that not all banks offer SBA loans. The SBA loans process is also fairly complex. 

Commercial Real Estate Loans

If you need to purchase property for your business, then you will need a real estate loan. A real estate loan requires a larger down payment than a residential property loan: up to 15% to 35% of the total property value. Also, commercial property loans have shorter repayment terms, on the order of 5 to 10 years. In general, there will be a penalty for paying off a commercial property loan early. 

Conclusions

Most business owners will have to seek out a commercial loan at one point or another. So, you need to make sure you understand the loan process and how banks deal with commercial loans. Before taking out this kind of loan, make sure that you have researched the commercial lending rates and that you have budgeted for loan payments. A commercial loan can be incredibly useful for growing your business, so make sure that you do your research.