Commercial loans in USA, A commercial loan is a type of business loan used to meet the business loan requirements. The amount taken by the borrower in the form of a commercial loan is always used in business. Now it depends upon the borrower where he spends this loan amount. But the one thing to be kept in mind is that he should prove to the bank where he spent the loan amount.
A commercial loan is used for many purposes, such as to meet the daily expenses needs of the business, buy the equipment’s for the smooth running of the company, start a new business, to expand the business in other cities by opening more branches of the industry and for many different reasons. There are many ways to get a commercial loan. But some of the bank requirements like documents and paperwork may be fixed. And you have to fulfill those requirements before taking any loan.
In this guide, you will learn various things about commercial loans, like the loan process, ways to get easily commercial loans, multiple types of lenders, types of commercial loans, and other things related to the commercial loan. So let’s get started.
How does the commercial loan work?
A commercial loan is a bridge between financial institutions and businesses. Business people or borrowers take commercial loans from banks, credit unions, private lenders, and other organizations. But in our view, the interest rate on the commercial loan is higher than different types of loans. In addition to that, you have to pay some types of fees other than the interest rate.
We will discuss the various types of fees associated with commercial loans later in this article. The borrower takes the commercial loan from the bank, and he has two to three options to pay the loan amount. As we clear that the term of the commercial loan is less as compared to the home loans. Because the risk is associated with the business loan or the commercial loan is more than the other types of loans.
Types of the Commercial loan
There are various types of commercial loans available in the market. It depends upon you for which purpose you get the commercial loan to fulfill the requirement of your business. We discuss here some of the types of commercial loans, which are as follows:
Long-term fixed Interest Commercial Mortgage.
It is the type of commercial loan which the borrower gets for his business. In this type of commercial loan, a borrower has to mortgage his property. It means that if he cannot pay his loan or get the default, then his property will be sold by the bank to recover the loan amount.
In addition to that borrower gets the long term to pay his loan amount in installments.
Usually, in this type of loan borrower gets five to twenty years to pay back his loan. Now the borrower has two options to pay the loan amount. One, he has to pay the monthly installment, which includes the principal and the interest amount.
In the second method, he pays only the interest per month, and at the end of the loan term, he has to pay the balloon amount. The balloon amount includes the principal amount of the loan and the interest charged on that loan.
Interest-only payment loan
In this type of commercial loan, the borrower gets the loan amount in his bank account. And he is liable to spend the amount only for his business purpose. So be aware while you are dealing with the commercial or business loan. Sometimes the loan officers come and inspect your loan amount where you spend.
Now, when you get an interest-only payment loan, you have to pay only interest per month for the loan term. Normally this type of loan should be for a five to seven-year period. So you have to pay the draw for the first five years if the loan term is five years. Then at the end of the loan, you have the balloon amount. It is the amount that contains the principal and the interest amount.
A construction loan is used for the construction of the building for business purposes. Like you want to build the office, malls, retail outlets, coaching center, and wholesale shop for your business. Then the bank gives you a construction loan. But here, you have to note the point. Such as the plot or the land on which you want to construct the building. That plot should be registered in your name or on your consigner.
Also, you can give the documents to the bank related to the property on which you want to construct the building. Bank inspects all your documents carefully. Then you will get a loan for the construction. Normally the loan term for this type of business loan should be seven years to 15 years. But some banks may give your more loan term if you negotiate with them.
It is the type of commercial or business loan. Suppose you have more than ten business sites which are come under the commercial loan. Then you are free to sell or purchase any of your business sites without getting much paperwork, but you have to inform the bank before selling or buying your business site. In addition to that, you will convert all your business loans into one blanket loan, which is beneficial for you.
A blanket loan is for the big businessman whose annual turnover is more than one crore dollars. It will save your time and money on paperwork every time you sell or purchase your business sites. Also, they get timely discounts from the banks when they pay their dues timely.
Hard money loan
A hard money loan is the type of business loan that is for the short term. In this type of loan, you will get the loan amount. And you have the specific time to pay the principal amount with interest charged on that amount. The loan term of these types of loans should be one year to two years. So you do not have to pay the EMI every month, but you should pay the principal amount with interest at the end of the loan term.
It is the type of loan in which you get the money again and again for your use. It is like a credit card in your business. You can use the money for your business, but you have to pay the principal amount with interest charged on that amount at the end of the month.
The advantage of these types of loans is that the bank charges you the interest only on the amount of money you used for your business. And not on the whole amount. We understand this thing with an example.
Suppose you have one lakh dollars in your account as a loan amount. And you use only 20000 dollars, then the bank charges the interest-only upon the 20000 dollars and not on the whole amount. That is the main advantage of these types of loans.
The process to get a Commercial loan.
To get a commercial loan, you have to fulfill some of the requirements of the banks. These requirements vary from bank to bank. But the basic needs are the same for all the banks. We will give you an idea about the needs and the documents, but the complete information is provided by the bank officials and the bank website. The process to get the commercial loan is as follows:
Pre-approved loan process
It is the starting of the loan process. When you call the bank or the financial institutions for the business or the commercial loan, then some of the loan requirements are fulfilled by the bank official over the phone or the email. Like bank officials ask about the life of your business, your credit history, and your annual turnover.
The first requirement for a commercial loan is that your business should be two years old and in running condition. Also, your credit score is above 750 to get the loan. In addition to that, your annual turnover should be above $250000. Then the bank official considers you for the business loan. Otherwise, he advises you to fulfill all the basic requirements for a commercial loan.
Suppose you fulfill the basic requirement of the bank for a loan. Then the bank official tells you to fill the application form, whether online or offline (by visiting the bank). You have to correctly fill in all the information that is asked by the loan application. After duly filled your loan application, you can attach some basic documents with this application.
Documents to be attached with the loan application are as follows:
- You’re personal ID card.
- Social security number.
- Driving license.
- Passport size photos.
- Profit and loss statement of your business.
- Past two-year business report.
- Plan of your business.
- Past two to three years tax file returns.
- Cash flow statement of your business.
These are the basic documents that you have to attach with your loan application. And you have to submit this application as soon as possible. Because sometimes, banks and financial institutions take time to consider your application.
Review of the loan application
It is the general process of the banks and the financial institutions that they can review your loan application. It generally takes two days to seven days for the revise of the loan application. Banks may check your cibil score from their side. Check the loan to debt ratio. And also, review the cash flow statements of your business. Some banks check your plan also. If they find you eligible for the business loan, then they will contact you within a week.
After considering all the documents and the loan application, the bank committee decided to disburse in your bank account. Before disbursing the loan amount, they will contact you, and if you are satisfied with the loan amount, the bank will disburse the loan amount in your bank. When you get the loan amount now, you have to keep a point in mind. You are bound to spend the loan amount only for your business and not for other things.
Advantages of the Commercial loan
There are various types of advantages of the commercial loan, which are as follows:
Access to Capital
You will get the amount in your bank account without any problem. In addition to that, you will get more loan amounts compared to other types of loan amounts. You get the money to meet your business requirements. Also, you define in your loan application for which purpose you spend the loan amount.
Easier Loan Application Process
The process of the business loan is easier. A loan application is so simple that even an undergraduate can fill it without any problem. Also, the documents that are attached with the loan application are easily available to the individual. And it depends upon the type of loan. And also on the kind of business for the timing of the loan to process.
Pre-approved checking is done over the phone.
When you call the bank for a business loan, then the bank official can pre-approve you over the phone call. And if you are eligible, then he will ask you some more questions. And for the loan application to be filled. But if the bank official found you not eligible for the loan, he asked to visit another bank over the phone call.
Disadvantages of the Commercial loan
Some of the disadvantages of the commercial loan are as follows:
Documents and the paperwork
The documents necessary with the loan application are more than other loans, such as personal loans. In business loans, there is a long list of documents attached with the loan application. And after you submit the loan application to the banks or other financial institutions, the application process takes more time as the bank officials thoroughly check all your attached documents and verify them.
Bound to use the funds for business only
You are bound to spend the loan amount only for business purposes and not for your personal use. But if you take a personal loan, then you are not secured. You have the option to spend the money for your dreams if you take a personal loan from the bank. After the loan amount is disbursal in a business loan, a bank official may check where you spend the business loan amount.
More interest rate
The banks charge you more interest rate in the business loan than other types of loans in the market. You get around a 3% interest rate in the case of a home loan, but in a business loan, you have to pay around a 7% interest rate. So before taking the business loan, consider the interest rate point.
More fees for a business loan
If you take a business loan from the bank, you have to charge more fees to the banks. In addition to the interest rate, you have to pay some more costs, which are annual and one-time fees. Some prices are like one percent of the outstanding loan amount you have to pay one time during the whole loan term. And another cost is like 0.25% have to pay every year.
The article concludes that there are lots of advantages of the commercial loans. Also, you get a commercial loan to enhance your business growth. But you have to compromise with the interest rate of the commercial loan. And some types of additional fees that are associated with your commercial loan. We discussed the various types of commercial loan and their benefits. I hope you like the article.