As you start or run a business, you might, at times, need financial assistance to buy new equipment, pay workers, train staff, set up new branches, or source for raw materials. One option to fund these is through a commercial loan. Fortunately, there are plenty of lenders you can rely on, each of which with its unique terms and conditions. Thus, it’s critical to understand some of the key things to look out for when seeking commercial financing.
Here are four things about business loans you must know as a borrower:
1. Interest Rates Vary
Commercial loan interest rates vary depending on the following factors:
- The type of lending institution: Apart from traditional banks, there are other certified non-bank lenders, as well as online lenders. All of these have varying interest rates. Generally, internet lenders have higher rates than both banks and lending institutions.
- The type of business: The less risky a business is, the lower the interest rates. This is because the lender has some degree of assurance that the borrower will be able to repay. High-risk businesses, such as online gambling, travel agencies, and cannabis distribution, attract higher interest rates.
- The amount of loan: Smaller loans usually attract a higher interest rate.
- Credit score: A few points off your credit score may mean you’ll be paying higher interest rates than someone else with an excellent score.
- Market-based factors: Factors such as inflation, government intervention, and competition also affect the interest rates. This post published here has more information on how banks set interest rates for commercial loans.
2. Additional Fees
Commercial loans come with all sorts of fees. Here are some of the major ones you may have to pay:
- Origination fees: This is a one-time fee, usually ranging between 1 and 5%, that the bank takes away from the cash they lend you to cover processing and administration costs.
- Appraisal fees: The money paid to a professional appraiser to evaluate the financial standing of your business.
- Survey fees: Payment for surveying your business or property before finalizing the loan.
- Legal fees: You pay this fee when the lender engages a third-party firm to scrutinize your legal documents.
- Application fees: Amount charged for processing and underwriting a loan. You must pay this even if your request for a loan is denied.
- Annual fees: Some lenders charge you some amount every year to keep your business line of credit open and active.
3. The Five C’s Of Credit
This refers to what commercial financing institutions look for when determining whether or not they’ll grant you the loan. Here’s a brief breakdown:
- Conditions: The various dynamics of the loan such as interest rate, repayment period, and amount borrowed.
- Collateral: The property and assets that you allow the lender to take from you in case you fail to fully repay the loan.
- Cash flow: Defines your current financial condition and the amount of money you get from your various sources of income.
- Character: Your credit score tells a lot about how you’ve been dealing with debt in the past, which can help lenders determine your likelihood of paying.
- Capital: Refers to how much money you have that you can invest in the business before taking the loan.
These are some of the areas you can work on even before applying for the loan. Approach the lender when you’re already fully prepared. The first impression you make will determine whether or not you’ll have the loan.
4. Processing Times
On average, a commercial bank loan takes about 45 days to process. That means you may have the cash within a month or, sometimes, have to wait longer for even up to 3 months. It takes this long because banks need several documents before they approve any loan. They wouldn’t want to rush into giving you cash before thoroughly proving you have a high chance of paying. Gathering all these documents takes several weeks.
But for online lenders who usually have more relaxed conditions, you can get the cash within a few business days. But it would be good to exercise a bit of caution with these lenders as the thought of fast cash can lure you into taking a loan with exorbitant interest rates.
5. Document Requirements
The easiest way to ensure a quick and easy closing of your commercial loan is to prepare the right documents. Here’s a list of documents that most commercial lenders require:
- Bank statements: Note that the name of your business must be on the bank statement. Also, the figures in your bank statement should match those in your financial statements.
- Financial statements: You’ll need the balance sheet, cash flow statement, as well as profit and loss statement. You’d want to ensure they’re written professionally by a certified public accountant.
- Tax returns: Both personal and business tax returns are necessary for loan processing.
- Business registration certificate: This acts as proof of the existence of your business.
- Business licenses and permits: These prove that your business is operating legally, making it non-risky for lenders.
- Employer Identification Number (EIN): You get this from the Internal Revenue Service.
- Details of other loans: Most lenders want to know whether you’re currently paying other loans to assess whether or not it’ll be challenging for you to add another loan on top of your current ones.
- Proof of collateral: If you list a certain piece of land as collateral, you must provide the corresponding title deed for the lender to be sure that it belongs to you.
- Business plan: This serves to gauge the feasibility of your business venture, that is, whether the plans you have are likely to work out or your idea has no probability of generating revenue.
Getting commercial financing for the development of your business is possible, as long as you know how to go about it. The points mentioned above give you a brief overview of how commercial loans work in terms of interest rates, processing fees, length of wait, and the assessment criteria. But the process isn’t without challenges, especially if your credit history is questionable or you don’t have enough valuable assets to act as collateral.
To stand a good chance of securing a commercial loan, you’d want to engage the services of a loan broker who has extensive experience in helping entrepreneurs get financial assistance.