A commercial loan is a debt-based funding arrangement between a business and a financial institution. It is used to finance capital expenditures and/or cover operational costs that the business may otherwise be unable to afford. A commercial loan can also refer to a specific type of business loan for commercial real estate financing need such as to refinance or purchase commercial real estate . A commercial loan does not include a loan for personal purposes, a loan secured by residential property or household vehicles, or a loan below a certain threshold.
Types of Commercial Loans
There are several types of commercial loans, here are some of the main types that are most common.
Lines of Credit:
An LOC (often referred to as a “revolver”) supports the working capital cycle for firms that sell on credit terms. There is no set repayment schedule; it’s structured to revolve up and down as balances change in the company’s working capital accounts.
Term Loans:
Term loans are used to acquire non-current assets, which include things like equipment, vehicles, and furniture. Term loans are typically amortizing, meaning they reduce with periodic payments (often monthly). At the time of loan advance, both the borrower and the lender will have already agreed upon a repayment schedule. The loan repayment period is generally aligned to the useful life of the underlying asset being financed.
Capital Leases:
Capital leases – sometimes referred to as “finance leases” – serve a similar purpose to term loans (meaning they’re used to finance non-current, capital assets like equipment). The main difference between a term loan and a capital lease is that the equipment finance firm funding the lease retains the legal title of the physical asset (as opposed to registering a lien over it).
Commercial Mortgages:
Commercial mortgages are another type of term lending but they’re used exclusively to finance (or refinance) commercial real estate. The analysis and underwriting techniques vary depending on whether the property is owner-occupied or if it’s an income-producing investment property; however, both tend to have more flexible terms (longer amortization, more favorable LTVs, very competitive pricing, etc.) than other types of commercial loans.
Acquisition Loans:
Acquisition loans are another category of commercial loan. These are used by businesses that are buying other businesses (or other business divisions) as opposed to physical assets like property or equipment. While not universally true, acquisition loans tend to have shorter amortization periods and lower loan-to-values than other types of commercial loans.
Bay City Financial offers a wide variety of commercial loan programs geared towards many types of commercial properties i.e. retail shopping centers, mixed-use, multi-family apartment buildings, industrial warehouses, office buildings, gas stations, single use properties etc. Also, we can help borrowers with the financing of business going concerns without the real estate as well as business loans for all types of business capital purposes.
Whatever your financial situation is, it is important to find the correct commercial investment property loan that not only has the most favorable terms, but also allows you enough capital to achieve your business goals.
