What Are the Types of Commercial Loans Available to Businesses?

What Is a Commercial Loan?

A commercial loan, also known as a business loan or industrial loan, is an arrangement between a financial institution and a business. Financial institutions, such as commercial banks and mortgage companies, offer this type of debt-based funding to companies across a wide array of industry sectors for a wide range of business purposes, such as:

  • For the funding of major capital expenditures
  • For inventory financing
  • To cover operational costs that the company is having trouble to afford
  • For investments in equipment

Types of Commercial Business Loans

There are several sorts of commercial business loans available to businessmen. These include accounts receivable loans, real estate loans, vehicle loans, lines of credit and construction loans. All these different types of commercial business loans can be split into two major categories: short-term loans and long-term loans. We’ll start by looking at the short-term ones first as there are fewer loans in that category.

1. Short-Term Loans:

A short-term loan is a type of credit that is obtained to support a temporary business capital. Just as with any other loan, the borrowed capital and the accrued interests have to be paid back within a certain amount of time (typically within a year).

1.1. Lines of Credit

A line of credit resembles using a business credit card. It allows you to draw money as you need but has a limit – just like a credit card has a credit limit.

1.2. Merchant Cash Advances

Merchant cash advances are also a type of loan. However, the payment for this loan is a bit different: the lender gets a percentage from every sale the borrower makes.

1.3. Accounts Receivable Loan

This type of loan comes in handy when your customers have not yet made their payments. Borrowers are typically eligible for this type of loan if they have creditworthy customers.

2. Long-Term Loans:

Funded all at once, long-term loans are perfect for providing a set amount of capital for specific needs. Unlike short-term loans, long-term loans are paid off over an extended time frame. This time frame generally exceeds one year in duration and entails making smaller monthly payments with higher interest rates. Moreover, long-term loans can be secured and unsecured. Cash, inventory, and equipment can be used to secure the loan.

2.1. Equipment and Vehicle Loans

Equipment and vehicle loans are commonly taken by companies for financing the purchase of equipment and vehicles. The equipment may include computers, printers, air conditioning systems, and other heavy equipment. The vehicles, on the other hand, can range from new to used and include cars, vans, trucks or other machinery. In the case of this type of loan, the repayment terms will vary depending on the type and age of collateral.

2.2. Real Estate Loans

Compared to a home loan, the real estate loan is a commercial real estate loan is a mortgage secured by a lien on a commercial property rather than on a residential property. The loan is interim or permanent financing taken for the purchase, refinancing, or construction of commercial buildings, such as apartments, office buildings, retail buildings, industrial buildings, medical/dental offices, and warehouses.

2.3. Construction Loan

A construction loan, also known as a “self-build loan”, is a short-term or interim loan. This type of loan is used to help pay for construction costs, such as materials and labor, until the retail, commercial, or residential development project can be refinanced. In simple terms, it covers the costs of the project until the owner or developer can obtain long-term funding.

2.4. Land and Subdivision Development

The Land and Subdivision Development loan is a type of loan that allows the borrower to do two things: 1) purchase a lot to build something on it or, 2) buy a piece of land to be subdivided. While subdivision loans usually allow up to 18 months to subdivide, develop and begin selling off the lots, lot loans usually allow up to five years for building.

2.5. Commercial Fishing Loan

As you can deduce from the name, this type of commercial loan is mostly concerned with vessels and all types of fishing and processing gear. Commercial fishing loans are structured to fit the seasonal nature of the business and, essentially, cover or finance for the purchase of Individual Fishing Quotas.

2.6. Letters of Credit

Letters of credit, also known documentary and standby letters of credit, are arrangements most often used by:
• import/export businesses
• contractors
• travel agencies
A letter of credit is meant to serve as an assurance of payment and are usually for less than six months (although it can be renewed annually). Once your application for a letter of credit is approved, your lender will send an official letter of credit to the vendor. The letter will guarantee a specific dollar amount.

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