Types of Commercial Loans

When it comes to securing a loan or financing for your business, there definitely isn’t a shortage of options!  The different types of commercial loans available have a variety of purposes.  Business loans are a tool in the toolbox of managing your business.  Used correctly, they provide the necessary leverage to grow & expand, purchase new assets, manage cash flow through seasonal fluctuations and more.  It is critical to pick the right “tool” for the job, so the tricky part is figuring out what you need, how much you need and not overextending your business, thus putting your financial situation at risk.

Sometimes it can be a bit challenging understanding all the types of loans and lingo that goes along with the financing industry.  If you have ever had difficulty figuring out the differences, this list is for you.

TYPES OF COMMERCIAL LOANS/FINANCING

A set amount of money that is fully disbursed in a lump sum and then paid back over a fixed number of payments (or installments) over a specified length of time; some types include:

  • Real Estate Construction Loans
  • Commercial Real Estate Loans (owner-occupied)
  • Investment Real Estate Loans (non-owner occupied)
  • Equipment Loans
  • Business Acquisition Loans – including seller carryback financing
  • Permanent Working Capital Loans
  • Microloans
  • Refinance

A loan with a maximum amount that can be drawn down and paid back as needed multiple times.  The user can borrow up to their credit limit again (after their debt is paid) without going through another loan approval process.  Typically used to provide working capital for seasonal businesses and is renewed annually based on business financial performance.

A letter from a bank that guarantees payment from a buyer to a seller.  Based on the bank’s analysis of the buyer and their ability to pay.  Can be used for new customers, large orders, most commonly in international trade when the reliability of buyers isn’t easily determined.

A loan program usually offered at terms unavailable through normal commercial loans or to fill gaps in financing packages. The terms can benefit the borrower &/or reduce risk for the lead lender. 

  • Federal - Small Business Administration Loans (SBA, such as SBA 504, SBA ILP, SBA 7a) & USDA Rural Development
  • State – Dept of Commerce, BND, Regional Councils, Economic Development Entities, etc.

Financing options tailored toward specific industries. Examples include:

  • Floor plan financing (auto dealers)
  • Practice financing (medical/dental)
  • Agribusiness loans
  • Inventory loans
  • Rolling stock loans
  • Fleet loans

A financial transaction in which a business sells its accounts receivables (outstanding invoices) to a factoring company or lender at a discount in exchange for a lump sum of cash.  Can be beneficial for businesses with very long average number of days to collect on invoices, typically is more expensive than other options.

A type of credit card offering certain rewards for businesses in exchange for usage. Typically has higher interest rates when not paid in full monthly.

A payment given to business in exchange for a percentage of future revenues and sales.  Typically have shorter terms to repay with more frequent smaller payments (daily or weekly) and higher costs or fees.

An owner grants another person the right to use their asset in exchange for a regular payment; often included with a buyout option at the end of the lease term.

A loan provided by shareholders or owners of a business.  The loans are represented as a debt for the company.  Payback terms and rates are more flexible and often times

A loan from a bank, credit union, or online lender to an individual that can be used for business expenses.  Used to leverage personal assets in order to obtain cash for the business.

A financing option that uses social media and websites to raise small amounts of capital directly from investors and entrepreneurs.  Depending on the platform, some are loans and some are grants.  Most commonly used for start-up businesses.

Beware as some online lending sites may be unsecure, too easy/good to be true, contain extremely high rates & hidden costs/terms or may be looking to scam a business.

WHAT YOU NEED TO KNOW ABOUT ANY TYPE OF LOAN

  • Length of term, length of amortization, is there a balloon payment?
  • Interest rate – fixed or variable, based on what index?
  • Payment amounts – monthly, annually, daily, weekly
  • Collateral - Secured/unsecured loans
  • Commercial/personal guarantees
  • Down payment requirements

Next time you visit with your accountant, banker, CFO, colleague, mentor or business partners, hopefully this info will help clear up conversations that have been previously as clear as mud!  The best advice we can give you is to ask questions until you understand and if you are working with financing or commercial loans, be sure to have a knowledgeable lender in your court that is willing to explore different options to find the best fit for you.  Sometimes that answer might be multiple loans, each with a specific purpose to help your business grow & succeed.