The most limiting factor when it comes to scaling a business is often the amount of funding the company has. Unless you happen to crush your first couple of years in terms of revenue, it can be difficult to find the money.
As such, many entrepreneurs choose to take out a loan in an attempt to further their business endeavors. Commercial loans were designed with this in mind.
While some loan applications may get declined by lenders, you will more than likely be able to acquire one if your company shows promise.
These loans are just like regular loans in the sense that you pay them back in full plus interest. Yet, there are a few key differences you need to keep in mind. Continue reading to learn all you need to know about commercial loans.
Know Your Options
Understanding the options that you have available to you in 2018 is the first step towards taking out a commercial loan for your company. Luckily, there are different paths that you can take to reach your financial goals.
You'll most likely be able to find one that is the perfect fit for you. Thus, you won't have to worry about taking out a large sum of money to handle small costs.
Today, many entrepreneurs are also turning to online loans for their company's financial needs.
Traditional Term Loans
As you may be able to tell from the name, a traditional term loan is the most common type of commercial loan that people pursue. This loan involves receiving a lump sum that you will eventually pay back over time.
The interest rates on these types of loans are generally fixed, meaning you won't have to worry about increasing interest as time goes on.
These loans range from $25,000 to $500,000, giving you plenty of room to work with. The repayment period can be anywhere from 1 to 5 years. Generally, however, a range of 1 to 2 years is most common.
Even if you plan on taking out a loan with a fixed interest rate, it's important to be very aware of the interest rate itself. The interest rate can go as high as 30%, which is something to keep in mind in 2018.
A Small Business Administration Loan, or SBA loan, is a loan that the Small Business Administration serves as a lender for. One of the best aspects of this type of loan is the flexibility that you receive.
You can take out an SBA loan for a large variety of business pursuits, such as real estate acquisition or when refinancing previous debt. Under certain circumstances, you can also take out an SBA loan to acquire another company.
But, the flexibility doesn't stop there. These commercial loans range from $5,000 to $5 million. As you would expect, a $5 million loan will take some time to pay off, which is why the payment term can be up to 25 years.
The highest interest you experience on SBA loans depends on your current situation in 2018. But, the interest rates often start under 7%, which will give you plenty of breathing room when it comes to managing debt.
Make sure, however, to keep an eye out for loans for large sums that come with a significant interest rate, as your debt will accumulate quickly as time goes on.
You can think of business credit as a credit card for your business. While it doesn't function exactly like a credit card would, there are some benefits that business credit has over using a credit card.
Access to lower annual percentage rates and cash that you can use for your company are the two main benefits that lendees see from business credit. Unlike other loans, however, there are some qualifications you have to meet first.
Provided that your company meets the annual revenue requirements of the lender, you'll be in the running to secure a line of business credit that can help your company grow.
You can visit a bank to discuss acquiring these commercial loans. Just be careful, however, that you don't spend more than you can handle paying back.
Working Capital Loans
Sometimes, you don't need a loan to cover hundreds of thousands of dollars in expenses.
The main benefit of loans of this type is that they don't require foresight months or years into the future. Some entrepreneurs aren't in a position to look that far ahead.
Due to the short-term nature of working capital loans, both business lines of credit and SBA loans can fall into the "working capital" category. However, this type of loan is not used to expand or scale.
Working capital loans cover the costs of daily operations for a predetermined amount of time, allowing you to focus on efficiency.
For example, if a company has a solid business model that will bring in significant revenue within three months, the owner may take out a working capital loan to cover expenses and bridge the gap between now and then.
The greatest advantage that working capital loans have for small business owners is the opportunity to avoid reaching out to potential investors.
Investors often take a percentage of ownership in businesses that they contribute to, giving them a say in how the company operates. But, borrowing money through a lender (even just for daily business costs) allows you to keep full ownership.
Since they aren't used to cover long-term expenses, their structure is very similar to that of short-term loans. This will allow you to avoid a multi-year commitment.
Sometimes, companies have their assets and business plans organized enough to scale on their own. It's not uncommon for some companies to need extra funds when it comes to obtaining the necessary equipment.
Note that an equipment loan differs from a general loan that you use to purchase equipment for your business.
This type of loan is unique in the fact that that the equipment you purchase is what's used as collateral. As such, securing an equipment loan is often fast and easy in 2018.
Like a business line of credit, there are often prerequisites to obtaining an equipment loan. In general, you'll have to put forth a down payment of up to 30% in order to obtain one. You'll also need to provide your tax returns.
Unlike business credit, however, your credit score is a factor that decides whether or not a lender will consider you as an option.
Commercial Loans and Corporations
Entrepreneurs who have incorporated their company can also benefit from a commercial loan. Corporations are responsible for a corporate debt, which gives you certain types of protection as an individual.
If you use your own finances to fund your company, you'll be missing out on the benefits of corporate protections on debt, such as securing your own assets from creditors.
Regardless of why you choose to incorporate your company, you should still practice reliable payment habits so that creditors see you as a worthy lendee in 2018.
How Do I Know If I Need a Commercial Loan?
The majority of people who need commercial loans are those who happen to have insufficient funds to meet their goals.
Thus, they take out extra money to help bridge the financial gap and to make enough money to profit after paying off their debt.
Securing a corporate loan can be complicated, but it doesn't have to be. Need more information on how to manage your business finances? Check out our blogs on funding your business.