6 Most Common Types Of Commercial Loans
Every business goes through the grim survival rules to save profits rather than increasing the expenses. Loans allow business owners to think big and plan an expansion or product line-up in the business.
These loans come in a variety of options depending on the needs of the business venture. One of these is commercial loans, which is the funding agreement between business and loan institutes like banks. Commercial loans are often described as commercial real estate loans. However, it is the general loan and provides funding for everything in small businesses. Apart from the terminologies, commercial loans are used for a variety of purposes. Whether it is the business expenditure, operation costs or purchase for real estate, commercial loans are primed for multipurpose. Many business owners consider commercial loans to receive funds for sustainable business operations.
Some researchers have also confirmed that only 3% of the business survives within five years, while others cease to exist. In fact, one aspect that plays a prime role in business survivability is the available funds.
Considering commercial loans can be beneficial for your business, but it depends on the type of commercial loans too. These loans come with an interest rate, lender fees as well as the down payments. With that, let’s discuss the six most common types of commercial loans.
- LINE OF CREDIT
Line of credit is the commercial loan issued by financial institutions such as banks. They allow the business owners to draw money within the credit limit. Plus, the banks also state the terms and interest rates for the issued loans. The interest rates for the line of credits are 7% depending on the credit limits. These loans are designed specifically for the short term cash needs, which can be used for business operations and other financial needs.
It is true that business owners are constantly bombarded with financial problems. However, six months to two years terms of the line of credits are the suitable option to cover the expenses for small businesses. This type of loan is chosen by manufacturers, business contractors, and suppliers, where frequent cash is needed. The banks also state the collateral and repayment are also mentioned in the document. On the other side, the loan eligibility depends on the production and sales in the business.
- LEASE FINANCE
Lease finance is the modern type of commercial loan that is designed for small businesses and individuals. Lease finance works by allowing the lessee with an asset for the business use on the monthly payment. The lessee will pay a specific amount monthly and allowed to use the asset for the business operations. The assets include vehicles, property, equipment and also software systems. The payment that is paid monthly to the lesser is termed as lease rental. This payment depends on the number of assets that are possessed by businesses.
Many businesses consider lease finance because of the less hassle for capital management. The monthly rental, along with the small percentage of interest, sounds great rather than purchasing new equipment with the cash. In this way, a business can consume expensive and high-quality equipment to generate maximum products and securing profits. Plus, the leasing terms in lease financing are also lower than any other financing types.
- COLLATERAL FREE LOANS
Collateral free loans are primarily designed for small and mid-sized enterprises. Collateral is the cash amount or assets that is lent against the borrowed cash or assets. For example, if you have borrowed a specific amount for your business, then your house or any building will be pledged for security. In the case of collateral-free loans, business owners do not have to offer any building or cash for the collateral and can avail the loans. These loans are available for all small and mid-sized businesses, where they have limited resources to offer as collateral. This type of loan can be used for capital, purchases as well as the expansion of the service.
The businesses are made eligible for the collateral-free loans after the verification of documents along with the credit history. The financial institutions offer collateral loans after scrutinizing the net income, age, employment, and financial stability of the business owner.
- SBA LOANS
SBA loans are offered from the guaranteed private loan programs, specifically designed for small businesses. SBA loans benefit the small as well as the long term cash needs of the business. SBA focusses on improving the quality of the loan by minimizing losses of the lenders. Since government involvement can mean a lot of improvement, the lenders are also encouraged to adopt the policies and regulations. The SBA requires lenders and borrowers to follow these regulations to improve financial funding and avoiding any loss.
With the little risk of loss, the financial institutions offer more opportunities for loans to different businesses. It may take some time to start receiving the loan funds because the government is monitoring the eligibility and regulations. But considering the benefits and repayment terms for the business, it can be the perfect choice to go for.
- COMMERCIAL REAL ESTATE LOANS
Commercial loans also assist business owners by finding real estate loans. These types of loans offer commercial properties, including building, workspace, warehouses, and manufacturing factories. The properties are often too expensive and difficult to afford by small businesses. However, the commercial real estate loans are also similar to the equipment loans that offer the property that acts as the collateral for loans. This means, even if the borrower defaults, the lender will have the choice to sell the valuable assets to cover the losses.
In this type of loan, the lenders are offered more incentives than the borrower. With that, the real estate loans are offered with very little interest and acceptable repayment terms for the borrowers. On the other side, real estate loans are very pricey because of the peak prices of the property. The repayment terms of the commercial real estate loans are 20 to 25 years.
- MERCHANT CASH ADVANCES
Merchant cash advances are another type of commercial loan that is offered through a single payment. This commercial loan gives the lender a percentage cut from the credit sales on a daily basis. This means that the lender will be taking the percentage cut from the daily sales until you pay the lump sum debt back. Apart from the return, the merchant cash loans are fast and easy to avail than any other type of commercial loan.
In the end, the loan choice depends on the business and the operations. No matter what is your requirement, there is a loan available for it. All it takes is the right amount of research for the lenders and interests for the offered loans.