The terms “commercial loan” and “business loan” are used interchangeably by many lenders. However, some lenders make a distinction between the two, targeting small business loans at smaller or newer businesses, and commercial loans at larger and more well-established businesses. Commercial loans can be used to cover business expenses and operational costs.
Commercial loans can be used for many purposes, including buying or constructing real estate or purchasing furniture or equipment.
Business owners can also use commercial loans to cover day-to-day business expenses. For example, a commercial loan can support cash flow when income is irregular. The cash infusion provides the funds to pay suppliers, maintain inventory or meet payroll.
Some lenders use the term “commercial loans” to refer to larger business loans, although in general, most lenders don’t differentiate between the two. You may be able to borrow up to $5 million with an SBA 504 “business loan,” for example, while Bank of America underwrites “commercial real estate loans” as small as $25,000.
Each lender sets its own requirements, rates and funding amounts. If a particular lender does make a distinction between business loans and commercial loans, that might be reflected in annual revenue or time in business. For example, a commercial loan might require a longer time in business or a higher annual revenue to support paying back a larger loan. A business loan, however, might have a lower qualification threshold for these criteria.
Let’s look at some common types of commercial loans and how they’re used.
Most people are familiar with the residential mortgages they take out for their home. Here’s how they compare to commercial real estate loans:
| Residential real estate loan | Commercial real estate loan |
|---|---|
| Qualify with personal credit | Qualify with business and personal credit |
| 15- or 30-year loans, typically | 5- to 25-year loans |
| Generally fully amortizing | May or may not be fully amortizing; if not, may require a balloon payment at end of term |
| Flexible options for down payment | Requires 20% down payment or more |
If you have a home-based business, like an in-home daycare or a room set aside for meeting with clients, you may not need a business real estate loan; a residential mortgage may be enough. Check with your lender to be sure.
Businesses have various lenders to choose from when looking to secure a commercial loan, including traditional banks, credit unions, lenders backed by the U.S. Small Business Administration (SBA), online lenders and Community Development Financial Institutions (CDFIs).
To help narrow your search, the following table outlines four options for commercial loans and their maximum loan amounts and minimum credit score requirements.
| Lender | How it works | Max. loan amount | Min. credit score | |
|---|---|---|---|---|
| Specific lenders offer these loans at lower rates by partnering with the SBA to guarantee a portion of your loan. | Up to $5,500,000 for SBA 504 loans | Most SBA lenders require a minimum personal credit score of at least 680 | See commercial loan offers | |
| FinanceFactory works with a network of lenders to offer different funding solutions to match your business needs. | Up to $5,000,000 | 600 | See commercial loan offers | |
| This bank offers commercial loans to well-qualified businesses. | Up to $3,000,000 | Not disclosed | See commercial loan offers | |
| This online lender offers commercial loans with no hard personal credit check. | Up to $500,000 for SBA 7(a) loans | 660 (650 for SBA 7(a) loans) | See commercial loan offers |
Understanding the terms, rates and fees associated with commercial loans is crucial for making an informed decision, as they can significantly impact your overall cost of borrowing.
Securing a commercial loan requires meeting specific qualification criteria set by lenders. While that criteria varies from lender to lender, here are a few common factors lenders look for.
Credit score: Your personal and business credit scores give lenders an indication of your history of managing debt and making on-time payments. Many lenders look for scores above 650, but minimum credit scores vary.
Business plan: A well-structured business plan showcases your business strategy, market analysis and financial projections. Lenders may look at your business plan to assess your business’s future profitability and ability to pay the loan as agreed.
Annual revenue: Your business’s annual revenue helps lenders gauge its financial stability. Higher revenues typically improve your chances of loan approval and may help you secure better loan terms.
Time in business: Many lenders prefer to work with companies that have been in business for at least two years, as a longer track record may reduce lending risk.
Down payment and/or collateral: Certain lenders or loan types may require a down payment or collateral, such as real estate, inventory, receivables or equipment. These reduce the lender’s risk and help you qualify for more favorable loan terms.
Commercial loans aren’t governed by consumer protection laws that help standardize consumer loans. As such, they can vary tremendously, and that means you need to pay careful attention to how they work.
Applying for a commercial loan can be long and arduous if you’re unprepared. While the process can vary from lender to lender, here are a few common steps that can help you apply efficiently and improve your chances of securing the best possible terms.
Assess how much you need to borrow and can realistically afford to repay. Consider your business’s financial health and the purpose of the loan to decide on a sensible loan amount.
Review the qualification factors, such as your business and personal credit score, annual revenue, time in business and available down payment or collateral. This self-assessment can help you understand your chances of loan approval.
Research various lenders, including banks, credit unions and online lenders. Compare their loan terms, rates, fees and eligibility requirements to find the best fit for your business needs.
Assemble the necessary documentation, including financial statements, business plans, tax returns, bank statements and business licenses and formation documents. You will likely need to submit these loan documents with your loan application.
Once your loan application is approved, review the loan’s closing documents carefully. These include the final loan terms, repayment schedule and additional obligations, such as providing annual financial statements or signing a personal guarantee. Ensure you understand all of these aspects before signing.
Several alternatives to commercial loans might be better suited to certain situations. Here are a few to consider.
Pro: No repayment required
Con: Highly competitive
Small business grants are ideal for businesses seeking funding without the obligation to repay a loan or give up a portion of their equity. They’re often aimed at certain industries or for specific purposes, such as innovation or community projects.
Pro: Easier to qualify for than commercial loans
Con: Lower borrowing limits
Small business loans are suitable for smaller businesses and startups that don’t require much working capital.
Pro: Accessible to businesses with limited credit history or collateral
Con: Limited loan amounts
Microloans are available in smaller amounts — typically up to $50,000. They’re available to small businesses who might have trouble qualifying for a business loan from a traditional bank.
Pro: Pay interest only on the amount used
Con: Usually come with variable interest rates
A business line of credit (LOC) is a revolving form of funding that allows businesses to withdraw funds as needed, borrowing up to the credit limit. After repaying the borrowed amount, the business owner can withdraw funds again. LOCs are a type of working capital loan useful for businesses that need flexible access to funds for ongoing operational costs.
Pros: Easy to use; can help build business credit and have potential to earn rewards
Con: May charge high interest rates if balance isn’t paid in full each month
Business credit cards are suitable for short-term financing or managing small, routine expenses.
Pros: Access to a broad pool of potential investors; doubles as marketing
Cons: May have to offer rewards or incentives to invest; funding isn’t guaranteed
Crowdfunding allows business owners to pitch an idea, set a fundraising goal and accept donations from the public through an online platform. GoFundMe is an example of a crowdfunding platform.
Crowdfunding can be a good option for businesses with a compelling story or a product that resonates with a wide audience.