Commercial loans are a type of loan designed to provide funding to a business opposed to an individual person. They are often used as a short term funding solution to purchase equipment, machinery or inventory to facilitate in the operation of a business. Additionally, commercial loans also regularly require some sort of business collateral, i.e. a property, a company vehicle or a piece of equipment that can be seized should the loan default.

The loan can be extended to help a business meet its basic operational needs, so for example to fund a business’s payroll or to help them purchase some small supplies for their production and manufacturing processes.

You can receive a commercial loan from three different types of lenders:

The first is the most common – a high street bank. These institutions have been around for centuries and as a result have the most stringent risk analysis of any lender. As a result, the majority of banks will decline 8 out of 10 commercial loan requests and tend to favour larger, high yielding loans.

Peer to peer bank loans are the newest type of lenders on the commercial market and tend to be granted entirely online. They are funded by individual and institutional investors, who decide to bid on and fund your business loan based on its risk.

Challenger banks are the lenders that may be the most likely to grant your commercial loan, with many of them having broader underwriting criteria for their business loans. Privately-run institutions often take a ‘creative’ look at business’s projects and, as a result, are more likely to take a ‘punt’ on your prospective investment.

There are a variety of different types of commercial loans that you can apply for based around what you need the loan for, how long it will take for you to pay it back and what is used as collateral should you default.

Secured Loans

The most common type of loan, a secured loan requires that the borrowing business pledges some kind of asset as collateral for the loan.

This is so that if the loan defaults and the business can’t pay back the funds, the lender can use the collateral as an alternative for the remaining loan fee.

Unsecured Loans

An Unsecured Business Loan is a commercial loan that doesn’t require any business assets as a form of collateral.

Instead, the loan’s ‘security’ is based solely upon a business’s financial history and prospective cash flow forecast, using this information, the lender can deem whether a business qualifies for the commercial loan.

Commercial Mortgages

Commercial mortgages are a larger form of loan designed to offer funding to businesses looking to purchase or invest in some form of property or premises for their company. They can be used to develop, refurbish or purchase residential or business-related property but often require a security due to the large amount often requested.

As you might expect, due to the larger amounts, the repayment period tends to be much longer and will charge interested on an annual rate, rather than monthly.

Card Machine Cash Advance

For e-commerce businesses in particular, a card machine cash advance can be a great way for businesses to get the funding they need through essentially borrowing from themselves. A cash advance takes into account your monthly turnover and will offer funding based on the money you’re due to earn.

How Do Commercial Loans Work?

Now it’s time to get into the finite details as to how commercial loans actually work and how you can be successful with your application. Before applying, you will need to know how much you intend on borrowing, the purpose of your loan, as well as the period of time you would like to make the repayments over.

The majority of larger commercial loans allow you to borrow between £1,000 and £3 million for your business and depending on how much you want, can take anywhere from 1 month to over 20 years to pay pack.

To qualify for a commercial loan you will need to be aged 18 or over, and be a sole trader, partner or director with the authority to borrow on behalf of your business.

As with every type of loan, a credit record will need to be checked by the lender to ensure the borrower can pay back their loan. However, unlike a traditional loan where an individual would give their credit score, a commercial loan requires that a business supply another type of documentation.  This comes in the form of a business’s balance sheets, a cash flow projection and other financial documents to prove that the company can repay their debt according to the established terms and conditions set by the lender.

When a business has its application for a commercial loan approved, it will be expected to produce monthly financial statements for the duration of the loan as further assurance for the lender.

Are Commercial Loans The Same As Commercial Finance?

Commercial loans are not the same as commercial finance. Commercial finance is a generic term used to describe a range of finance based services that businesses can take advantage of, whereas a commercial loan is a specific finance based service, where businesses can borrow money from lenders to pay for the operational cost it takes to run a company.

Commercial Loan Rates & Terms

Commercial loan rates and terms tend to differ from lender to lender, but the core foundations of each loan tend to remain. The majority of commercial loans have a fixed rate of interest during a fixed period ensuring that your business will know exactly what repayments are due each month, letting you plan your finances appropriately.

Also, it’s likely that when you successfully apply for a commercial loan you’ll be charged an additional arrangement fee on behalf of your lender, this is to cover any costs your lender may have incurred when organising your loan.

We hope that this guide has helped you understand a bit more about commercial loans and how you could potentially apply for one yourself. For more information on how you could compare commercial loans you can contact one of our expert team, today.