In this article, you will learn:
- The difference between a commercial loan and a business loan
- The types of small business loans available
- What the SBA is, and why it is so important in business lending
- How a business loan has the potential to transform your companyâs future
Funding a business can be a major challenge. Itâs standard practice for businesses of all shapes and sizes to secure loans to help them get started and grow â but knowing what type of funding to look for as a potential borrower is often confusing.
To get on the right track, itâs important to understand the terminology used in business financing. Specifically, youâll want to have a solid grasp of the types of loans available to you as a business owner so that you know what financing options are on the table.
Letâs dive in.
Are Commercial and Business Loans the Same Thing?
Letâs get right to the title question of this article â yes, commercial and business loans are, generally speaking, the same thing. Whether you use the word âcommercialâ or âbusinessâ to describe this type of loan, you are talking about a financial institution loaning money to a business (rather than an individual) with specified terms of repayment.
Having said that, while there is no formal difference between these two terms, you might find that in the vernacular, âcommercial loansâ is more commonly used when referring to loans given to larger businesses, while âsmall business loanâ is used to refer to loans given to smaller companies
Why does it matter? If you are a small business owner and you see loans that are marketed to commercial clients, thatâs probably not a product that will fit your needs. On the other hand, if youâre running a large-scale operation, youâre probably not going to be interested in products marketed with âsmall business loans.â
The Basics of Business Loans
One of the things that many business owners struggle with is that there are so many types of loans available that itâs hard to make sense of them at first. Especially when each loan is designed to meet a specific business need.
So before heading out in search of a general âbusiness loanâ, it will be more productive to think about what type of loan you need and how the money will help your business grow and thrive.
Some of the common types of commercial loans used by small businesses include the following:
- SBA loan. We will talk about this topic more in-depth below because it is such a big factor in the world of small business lending. SBA stands for Small Business Administration, which is a U.S. government entity that guarantees term loans that lenders provide to small businesses. This program serves to stimulate lending to businesses that might not otherwise be able to secure a low interest rate on the funding they need to succeed. If you run a small business, there is a good chance getting funding through the SBA program will be your best bet.
- Equipment financing. One issue that can hold back small businesses is an inability to purchase the equipment they need to scale up operations. Even if the manufacturer offers financing for their equipment, the higher interest rates they offer may make it too expensive. With equipment loans, you can make a purchase that you might have otherwise put off for years until it was affordable, and you might be able to do it with lower interest rates. That means a quicker timeline to scale up your business, and hopefully a big boost to profits.
- Line of credit. Opening a line of credit for your business is similar to taking out a credit card. Unlike a term loan, where you get a lump sum upfront, with a line of credit, you get access to as much buying power as your credit line allows, but you donât have to use it all at once, or at all, and you only pay interest on what you use. Lines of credit are a popular option for businesses that may have down periods during the year when their cash flow is insufficient to make ends meet. During those times, the line of credit can be used, and it can be repaid during the busier time of year.
- Unsecured business loan. An unsecured business loan is a loan that isnât secured by any collateral. However, this typically means that the loans are harder to get and have a high interest rate. Generally speaking, an unsecured business loan is somewhat of a last resort if other funding options are not available due to the unfavorable terms.
What Are the Benefits of a Commercial Loan?
There is something to be said for the idea of getting a business off the ground without a loan â and then bootstrapping it, or continuing to run it without outside funding. You might be tempted to go this route and do it all on your own, however doing so will frequently put you at a significant disadvantage compared to the competition.
When used properly, a commercial loan can go a long way toward improving the prospects of your business. Here are just a few of the things a loan can help you do:
- Take the next step. If you have a small business that is up and running and turning a profit, you have already proven that the market is receptive to your ideas and products or services. With that said, you might not have the working capital available to expand your business into new markets and open additional locations. Through business lending, you can multiply the number of people you are able to serve and the money you can make.
- Establish credit. Just like when you build your personal credit score by using a credit card and paying it off, opening a business line of credit and making timely monthly payments will build your credit score and open up the opportunity for additional funding options in the future.
- Smooth out cash flow. Itâs one thing to have a business that makes sales and turns a profit, but itâs another thing entirely to do that with a steady cash flow that makes it easy to pay the bills. Many businesses use lending to deal with cash flow issues so they can cover their obligations and not stress over the timing of customer payments.
- Navigate the unexpected. Should an emergency situation happen to come up in your business that threatens your ability to operate, a loan could be what allows you to stay in business. Assuming you have a business that is generally profitable under normal conditions, you can use a loan to deal with the tough times, and you can pay off the loan when things settle down and revenues are flowing once again.
- Get started. Business financing isnât just for companies that are already establishedâit can also be used to help new businesses launch. The startup phase is often the most difficult to deal with in terms of financing since there are so many expenses to manage, and you donât yet have customers to supply you with cash. It would be a shame to leave a great business idea on the shelf simply because you didnât have the funds to get it started. While many lenders require a business to be operating for one to two years before offering a loan, you may still be able to get a business credit card or line of credit to help you launch. Or you can also pursue a personal loan, although you will have to personally guarantee the loan.
SBA Loans Have a Lot to Offer
Weâve already mentioned the importance and popularity of SBA loans in this article. Letâs come back to that topic now by looking a little closer at the types of funding available through the SBA program. If you decide to pursue this type of loan, you can work with Biz2Credit to go through the application process to check your eligibility.
For the small business that only needs a modest loan, an SBA microloan is a great option. The limit for this program goes up to $50,000, which isnât a huge amount of money in the world of commercial lending, but it can still make a big difference for many small businesses. The use options for microloans are many, including buying inventory, managing startup supplies, acquiring equipment, and much more. Finding a microloan with good repayment terms for your business needs can be a turning point for your company.
This is the standard type of SBA loan and the one youâll probably start looking at first. Unlike the microloan program, which only grants up to $50,000, you can borrow as much as $5 million for the loan amount with this loan program. Of course, you will have to qualify for whatever amount of money you hope to secure for your business, and your credit history and current business revenues will play a part in that qualifying decision.
It should be noted that businesses need to be operating at a profit if they are to be eligible for an SBA 7 loan. Other items on the loan application include doing business in the United States, demonstrating the need for this loan, and not having any outstanding debts with the government. Plenty of documentation will be required to prove your creditworthiness for this category of lending, including income tax returns, business plans, leases, financial statements, and many other pieces, so the process for receiving funding can be lengthy.
If you have a project in mind that has the potential to grow your business in the long run, you might be able to secure an SBA 504 loan. As with the 7(a) loans, there are requirements such as operating in the U.S. and running a business that already turns a profit. Also, there is a cap on the size of your business if you want to pursue a 504 loan, with no more than an annual net income of $5 million allowed.
This is not one of the loan types to consider if you are looking for working capital or if you are dealing with a debt load that needs to be paid down. Rather, 504 loans are for assets like purchasing a new piece of land or buying new equipment that is expected to last for many years. You may also qualify if you are going to use the money for significant upgrades to existing commercial property.
The Right Funding Makes a World of Difference
Success in business is about more than having a good idea and finding the right market. Those are essential, of course, but you also need to have the funds available to bring your vision to life. Matching the right type of loan to the needs of your business will make it possible to accomplish great things that simply would not have happened without help from commercial lenders. Like Rattan Soni, who used a commercial loan to help her hotel business thrive.
If your business is in a position where funding could make all the difference, Biz2Credit would love to help. Get in touch with our team today to learn more.