What are commercial loans?
Commercial loans help businesses cover big expenses like expanding, buying property, upgrading equipment or managing cash flow. They work best for short-term needs and established businesses, not startups.
These loans usually come from banks, credit unions or online lenders and often require collateral, paperwork and meeting certain financial terms. Before applying, make sure you understand how the loan works, what it costs and what’s required to qualify.
- Understanding your loan options is important. Each commercial loan may serve a different purpose, like buying property, financing equipment or expanding your business, so choose one that fits your goals.
- Lenders expect detailed financial paperwork. Be prepared to submit tax returns, business plans and cash flow projections, to help your chances of qualifying.
- Most commercial loans require collateral or a personal guarantee. Repayment terms vary by loan type, but usually range from one to 25 years.
Common uses for commercial loans
Commercial loans can help a business grow, stay stable or invest in big projects. Lenders want to see that the loans will help the business earn more money, run more efficiently or increase the value over time. Here are common ways businesses use these loans:
- Real estate acquisition or refinancing. Buying office space, warehouses or retail locations is a common driver. Refinancing can reduce rates or access equity for expansion.
- Equipment purchase. Businesses often finance high-cost machinery, vehicles or technology infrastructure to spread the cost over time and preserve working capital.
- Construction and development. Commercial construction loans support ground-up development, tenant improvements or major renovations. They are usually short term and interest-only until project completion.
- Business expansion. Funds may support new locations, product lines or workforce growth, particularly for businesses with predictable revenue and a scalable model.
- Acquisition financing. Used to acquire another company or buy out a partner. This typically involves a mix of debt, equity and sometimes seller financing.
- Working capital and cash flow management. Some term loans or lines of credit are used to bridge seasonal revenue gaps, cover payroll or manage receivables.
Lenders scrutinize each use case differently. Asset-backed purchases tend to receive more favorable terms, while working capital or intangible investments may require stronger financials or guarantees.
Comparison of common commercial loan types
Each loan type is designed for a specific business use case, with distinct underwriting standards and repayment expectations.
| Commercial Real Estate Loan | Purchase or refinance property, including offices, warehouses, and retail space | 5 to 20 years, often with balloon payments | Real estate, usually capped at 70%-80% loan-to-value (LTV) | $100,000 to $10M+ | 5% to 10% (fixed or variable) |
| Term Loan | Business expansion, equipment purchase, or working capital | 1 to 10 years, fully amortizing with fixed or variable rates | Equipment, receivables, or business assets | $25,000 to $5M+ | 7% to 60% (fixed or variable) |
| SBA 7(a) Loan | Business acquisition, real estate, or equipment financing | 7 to 25 years, depending on loan purpose | Real estate, equipment, or other business assets | $50,000 to $5M | 10.5% to 15.5% (fixed or variable) |
| Commercial Construction Loan | Building new facilities or renovating existing structures | Short term, interest-only during construction, followed by conversion to permanent financing | Real estate or property being developed | $500,000 to $10M+ | 4% to 12% (variable) |
| Business Line of Credit | Short-term working capital needs, seasonal cash flow | Revolving, typically renewed annually | Receivables, inventory, or business assets | $10,000 to $500,000 | 8% to 99% (variable) |
Where commercial loans come from
Commercial loans are offered by a range of lenders and financial institutions, each with its own underwriting standards, timelines and levels of flexibility. Understanding who you’re borrowing from can help you anticipate the tradeoffs in speed, cost and structure.
- Traditional banks. Large national and regional banks offer competitive rates and longer terms, but typically require strong credit, documentation and collateral. Underwriting can take several weeks.
- Credit unions. Often more relationship-driven, credit unions may offer favorable terms to local businesses, but have limited geographic reach and industry flexibility.
- Nonbank lenders. These include online lenders, private capital firms and fintechs. These types of lenders often fund faster and underwrite more flexibly, but with higher rates and shorter terms.
- SBA-approved lenders. Banks and nonbanks that participate in SBA loan programs can provide government-backed loans with longer terms and smaller down payments, particularly for borrowers who may not qualify for conventional credit.
Choosing the right lender depends on your timeline, the strength of your financials and the complexity of your financing needs. A well-capitalized business with strong credit sees the most competitive options from traditional lenders. For faster access or less conventional needs, nonbank lenders may be more realistic.
Expert insight: The right fit matters
“Banks and credit unions usually offer the lowest rates, but they also move incredibly slowly. They have strict requirements, long processes and often want collateral. If you don’t check all their boxes, it’s tough to get through.
Private credit, on the other hand, is much faster and more flexible. It costs more, but it’s built for speed and access. You’re not jumping through a million hoops. You can get funding without putting up your house or waiting weeks. They’re not tied to banking regulations, either, so they can continue to lend during times of economic uncertainty.
Bottom line: apply to a few different lenders, compare the offers and pick the one that aligns with your business goals — not just the lowest rate. The right fit matters way more than just the cheapest option.”
Joe Camberato
CEO of NationalBusinessCapital.com
How lenders evaluate commercial loan applications
Loan approvals hinge on the 5 C’s of credit: capacity, capital, collateral, character and conditions. Expect a thorough review of business and personal financials, particularly for loans over $250,000.
- Creditworthiness. A business credit score above 75 and a personal FICO score over 680 are often baseline expectations. Lower scores are sometimes offset with collateral or strong financials.
- Cash flow and debt service coverage. Lenders look for a DSCR (debt service coverage ratio) of at least 1.25, indicating the business generates 25% more income than its debt obligations.
- Collateral. Real estate, equipment, or receivables often serve as security. Unsecured options exist, but come with higher rates and shorter terms.
- Business history. Two or more years in operation is typical, though SBA programs can be more flexible for newer businesses with strong projections.
Expert insight: Leverage your network for better terms
“When we needed working capital for inventory expansion at the dealership, I learned that demonstrating manufacturer relationships and allocations carried more weight than traditional collateral. Banks understood that GM/Buick backing meant predictable cash flow cycles. This translated directly to better terms — we secured a $2.8M floor plan facility at prime + 0.5% versus the standard prime + 2%.
The biggest mistake I see clients make is treating commercial lending like residential mortgages. Commercial lenders care about your business relationships and market positioning more than personal credit scores … My advice: bring your business network to the table, not just financial statements.”
David Grenier
Dealership President and Business Attorney
Down payments and equity requirements
Most commercial loans require a down payment or equity contribution, especially when financing real estate, equipment, or acquisitions. The size of the down payment depends on the loan type, collateral, and lender risk tolerance.
- Commercial real estate. Expect to put down 20% to 30% of the purchase price. SBA 504 loans may allow as little as 10% down, depending on the borrower profile and property type.
- Equipment financing. Down payments typically range from 10% to 20%. In some cases, lenders offer 100% financing for established businesses with strong credit.
- Acquisition financing. Buyers are usually expected to contribute 10% to 25% equity. Larger deals often involve layered financing, including seller notes or investor capital.
- SBA 7(a) loans. The SBA requires at least 10% equity injection for startups and acquisitions. For existing businesses with strong cash flow, equity requirements may be lower.
Lenders view borrower equity as a signal of commitment and financial stability. A higher down payment can improve loan terms and increase approval odds, particularly when other parts of the application are borderline.
When a commercial loan makes sense
Commercial loans work best when the borrowed funds produce a measurable return over time, such as increased revenue, reduced costs, or strategic growth. They’re ill-suited for speculative ventures or when cash flow is highly unpredictable.
- Good fit for: Purchasing property for business use, acquiring another business, financing major equipment, or long-term expansion plans.
- Less appropriate for: Early-stage companies, unpredictable revenue models, or short-term working capital needs better served by lines of credit or accounts receivable financing.
Who uses commercial loans?
Commercial loans are structured for established businesses with clear capital needs and a path to repayment. Borrowers typically fall into one of several categories, depending on their growth strategy, asset needs, and financial profile.
Persona 1: The growth-stage owner-operator
- Business type: Multi-location retail or service business (e.g., veterinary clinics, fitness franchises).
- Loan goal: Finance the buildout of a new location.
- Typical loan type: SBA 7(a) or conventional term loan.
- Priorities: Longer repayment terms, moderate down payment, ability to preserve working capital.
- Challenges: Navigating SBA documentation, balancing growth with cash flow needs.
Persona 2: The industrial property investor
- Business type: Real estate holding company or logistics business looking to acquire warehouse space.
- Loan goal: Purchase and hold income-producing commercial property.
- Typical loan type: Commercial real estate mortgage, possibly with a balloon structure.
- Priorities: Low rate, fixed or semi-fixed term, favorable prepayment structure.
- Challenges: Meeting DSCR thresholds, managing lease-up risk.
Persona 3: The manufacturing CFO
- Business type: Mid-size industrial manufacturer with seasonal cash flow.
- Loan goal: Finance $500,000 in new equipment to expand production capacity.
- Typical loan type: Equipment loan or capital term loan.
- Priorities: Fixed monthly payments, quick funding, ability to depreciate assets.
- Challenges: Coordinating equipment delivery with financing timeline, minimizing impact on existing credit facilities.
Pros and Cons of Commercial Loans
Commercial loans offer powerful funding options for growing businesses, but they come with trade-offs that are important to understand before borrowing.
Pros
- Scalable funding. Commercial loans provide large sums of capital, making them ideal for expansion, acquisitions, and significant business investments.
- Lower interest rates. Compared to personal loans or credit cards, commercial loans typically offer more favorable interest rates, especially for established businesses with strong financials.
- Tax benefits. Interest payments on commercial loans may be tax-deductible, providing potential savings for your business.
- Long-term financing. Many commercial loans offer extended repayment terms (up to 25 years), spreading out payments and easing cash flow pressures over time.
- Collateral options. Loans can be secured by a variety of business assets, such as property, equipment, or receivables, giving businesses more flexibility in obtaining financing.
Cons
- Lengthy approval process. Commercial loans require extensive documentation and can take several weeks to approve, especially with traditional lenders.
- Collateral risk. Securing a loan with business or personal assets means you risk losing those assets if your business struggles to meet repayment obligations.
- Complex requirements. Meeting the financial criteria for larger loans can be difficult, with lenders often expecting high credit scores, solid business plans, and robust cash flow projections.
- Prepayment penalties. Some commercial loans may charge fees if the loan is repaid early, which can reduce flexibility for businesses with fluctuating cash flow.
- Strain on cash flow. Regular repayments can put pressure on a business’s cash flow, particularly if revenue is inconsistent or if the loan is large relative to the business’s size.
How to apply for a commercial loan
Getting a commercial loan takes more time and paperwork than smaller business loans. Lenders want to know your business is financially strong, that you can repay the loan and that you have something to offer as collateral. Here’s a simple step-by-step guide to help you prepare:
- Know what you need. Decide how much funding you need and what you’ll use it for — like buying property, expanding your business or managing cash flow. Lenders will ask, so be ready to explain.
- Check your finances. Review your credit score, business revenue and existing debt. Strong financials improve your chances of approval and help you qualify for better rates.
- Gather your documents. Prepare business tax returns, financial statements, a business plan, cash flow projections and details about any assets you’ll use as collateral.
- Compare lenders. Shop around with banks, credit unions and online lenders. Look at interest rates, repayment terms, fees and eligibility requirements to find the best fit.
- Submit your application. Apply with your chosen lender. Be ready to answer questions and provide more information during the review process, especially for loans over $250,000.
What documents you need to apply
Before approaching lenders, gather the following:
- Three years of business and personal tax returns
- Current year-to-date profit and loss statement and balance sheet
- Cash flow projections (especially for expansion or startup funding)
- Debt schedule outlining all current business obligations
- Business plan and ownership structure, if applicable
- Details on intended use of funds
For SBA loans, be prepared to complete additional forms, including a personal financial statement and management resumes for owners with 20% or more equity.
Types of collateral you can use for commercial loans
Most commercial loans are secured. Lenders evaluate collateral based on type, condition, marketability, and loan-to-value (LTV) ratio.
- Real estate: Most common form of collateral. Lenders usually cap LTV at 70% to 80% of appraised value.
- Equipment: Must be essential to business operations and verifiable. Lenders may use discounted or liquidation value for underwriting.
- Receivables or inventory: Used to secure lines of credit. Advance rates are usually 70%–90% for receivables and 50% or less for inventory.
- Personal guarantees: Most lenders require personal guarantees from primary owners, especially for small to mid-size firms.
Tips to increase loan approval chances and lower costs
Securing a commercial loan with favorable terms requires more than just filling out an application. Lenders evaluate multiple factors and certain strategies can improve your chances of approval while helping reduce the loan’s overall cost.
- Maintain a strong credit score
One of the primary factors in loan approval is your credit score. A score above 680 is often the baseline for securing competitive rates. If your credit score is lower, work on improving it before applying by paying down debts and ensuring timely payments.
- Prepare a solid business plan
A well-structured business plan demonstrates to lenders that you have a clear roadmap for success. Include detailed financial projections, a breakdown of how the loan will be used and any strategies for risk mitigation. A strong plan reassures lenders that the loan will be repaid on time.
- Provide collateral
Offering collateral reduces the lender’s risk and may lead to lower interest rates. Common collateral types include real estate, equipment or receivables. The more valuable your collateral, the more likely you are to receive favorable terms.
- Strengthen cash flow and debt service coverage
Lenders will closely examine your cash flow and ability to meet debt obligations. Ensure your business generates steady revenue and maintains a healthy debt service coverage ratio (DSCR). A ratio of 1.25 or higher is typically viewed favorably, signaling you can cover the loan repayments comfortably.
- Offer a larger down payment
Providing a larger down payment reduces the lender’s exposure and may result in a lower interest rate. Aim for at least a 20% down payment for commercial real estate loans or higher for riskier ventures like startups.
- Build a relationship with your lender
It’s usually best to work with a lender you have a relationship with, if possible. Lenders who are familiar with your business are more likely to offer favorable terms. Consider opening a business account or applying for smaller loans in the past to build rapport.
- Shop around for the best deal
Don’t settle for the first loan offer you receive. Different lenders may offer varying rates, terms and fees. Shop around and compare options to find the loan that best suits your needs. Consider working with a broker to help you navigate your options.
- Reduce your business’s debt load
If possible, reduce your existing business debt before applying for a new loan. High levels of debt can signal to lenders that your business is over-leveraged and may struggle to repay additional obligations. Reducing debt improves your financial ratios and makes you a more attractive borrower.
- Choose the right loan type
Choosing the right loan for your business type and needs can help lower your costs. For instance, SBA loans offer lower interest rates and longer repayment terms, but they may require more documentation. On the other hand, traditional loans may be faster to process but come with higher rates. Select the option that fits your business model and financial situation best.
- Avoid recent major changes in business operations
Significant operational changes, such as leadership turnover or business restructuring, can raise concerns for lenders. If possible, maintain stability in the months leading up to your loan application to show that your business is in a strong position to succeed.
Expert insight: Flexibility is affordability
“When a manufacturer of beverage equipment came to us needing $450K, their two-year track record and existing vendor relationships with established distributors got them approved at 8.2% versus the 12-15% rate newer businesses typically see… A landscaping company saved 40% on their total financing costs by agreeing to higher payments during their busy months (April–October) and minimal payments during winter.
Most borrowers don’t even know flexible payment structures exist, but they can make or break a deal’s affordability.”
Vincent Cerniglia
Principal/VP at Noreast Capital Corporation
Alternatives to commercial business loans
Commercial loans aren’t always the right fit — especially for newer businesses, smaller financing needs or situations that require speed and flexibility. These alternatives can offer faster access to capital or different structures that better suit your business’s cash flow and risk tolerance:
- Business credit cards. Useful for managing smaller purchases, recurring expenses or travel. Many offer rewards or 0% introductory APRs, though rates can be high if not paid off monthly.
- SBA microloans. Designed for startups and smaller businesses, these loans offer up to $50,000 with relatively low rates and flexible terms — backed by the US Small Business Administration.
- Equipment leasing. An alternative to purchasing outright or financing, leasing spreads costs over time without requiring a down payment or long-term debt.
- Invoice financing or factoring. Helps businesses access cash quickly by advancing funds against outstanding invoices. Best for companies with reliable receivables and slow-paying customers.
- Revenue-based financing. A good fit for companies with predictable monthly revenue. Repayments are a fixed percentage of income, which adjusts automatically with cash flow.
- Crowdfunding or peer-to-peer lending. Nontraditional funding from individuals or investor groups, often used for early-stage ventures or niche markets. Terms and costs vary widely.
Bottom line
Commercial loans can support growth, stability, or acquisition, but they require clear cash flow, solid financials, and a willingness to commit assets. Businesses should weigh the structure and impact of each option before committing to long-term debt.
