How to Get Commercial Loans and What Lenders Look For

Commercial loans provide capital for businesses to fund operations, pursue growth, acquire equipment, or invest in real estate. Securing this funding involves understanding available loan types and navigating a structured application and approval process.

Types of Commercial Loans

A term loan provides a lump sum repaid over a specified period with fixed or variable interest rates. Businesses commonly use these loans for significant, one-time investments like purchasing equipment, acquiring a new building, or funding expansion.

A business line of credit offers flexible access to funds up to a predetermined limit, similar to revolving credit. Interest is typically paid only on the amount drawn, making it suitable for managing fluctuating cash flow, covering unexpected expenses, or addressing short-term working capital needs.

The U.S. Small Business Administration (SBA) guarantees a portion of certain loans issued by traditional lenders. SBA loans, like the 7(a) program, can be used for real estate acquisition, equipment purchases, and working capital, often featuring high borrowing limits and flexible terms. The SBA 504 loan program specifically supports major investments in fixed assets like heavy equipment or commercial real estate, usually for job creation or community development.

Equipment financing, through a loan or lease, enables businesses to acquire machinery, vehicles, or technology without a large upfront capital outlay. With an equipment loan, the acquired equipment typically serves as collateral. Equipment leases allow businesses to use assets for a set period with monthly payments, often resulting in lower immediate costs and offering options to purchase or return the equipment at the end of the term.

Commercial real estate loans are tailored for purchasing, refinancing, or developing properties like office spaces, retail locations, or warehouses. These loans often involve substantial amounts and extended repayment terms, sometimes up to 25 years. Accounts receivable financing, also known as factoring, involves a business selling its outstanding invoices to a third party at a discount to obtain immediate cash. This approach improves short-term cash flow by converting future payments into present liquidity, without incurring additional debt.

Lender Considerations and Eligibility

Lenders evaluate various factors to assess creditworthiness and loan risk. Business credit scores and history are reviewed to gauge past financial behavior and repayment reliability. For smaller businesses or startups, the owner’s personal credit score is also a significant factor, as it can indicate debt management ability and may be required for a personal guarantee, making the owner personally liable if the business defaults.

Lenders require a clear business plan articulating the company’s mission, market position, growth potential, and how the loan will support long-term goals. Financial health is another core consideration, with lenders scrutinizing profitability, consistent cash flow, and debt-to-income ratios to ensure the business can manage additional debt. They analyze historical, current, and projected financial statements, including income statements, balance sheets, and cash flow statements, to understand the business’s ability to service the debt.

Collateral is often required for commercial loans, providing a secondary source of repayment if primary cash flow is insufficient. Common types include real estate, equipment, inventory, and accounts receivable, assessed for market value and liquidity. The Debt Service Coverage Ratio (DSCR) indicates a business’s ability to cover debt payments from net operating income; lenders prefer a DSCR above 1.25 for adequate coverage.

The time a business has been operating and the owner’s industry experience can influence a lender’s decision. Businesses with a longer track record often demonstrate greater stability and a proven ability to generate revenue and manage operations. While some online lenders may consider businesses with six months in operation, traditional banks and SBA lenders prefer at least two years in business.

Application Process and Required Documentation

The commercial loan application process begins with an initial inquiry to a loan officer to discuss needs and determine suitable programs. This conversation helps align funding purpose with available options and clarifies preliminary requirements. Lenders provide specific application forms that must be completed accurately and comprehensively.

A comprehensive set of documents is required to support the application, providing lenders with a detailed financial and operational picture of the business. Business financial statements, including balance sheets, income statements, and cash flow statements, for the past two to three years are essential to demonstrate financial health and profitability. These documents help lenders assess liquidity and debt management ability.

Business tax returns for the most recent two to three years are required to verify income and ensure consistency with financial statements. Personal financial statements and tax returns for business owners are often requested, especially for small businesses, to assess personal financial health and potential for personal guarantees. Business and personal bank statements, usually for the last six to twelve months, provide insight into cash flow patterns and spending habits.

Legal documents, such as articles of incorporation, business licenses, and operating agreements, confirm the business’s legal structure and compliance. If collateral is offered, documentation like real estate deeds, vehicle titles, or equipment appraisals will be needed to establish ownership and value. A detailed business plan, outlining company goals, strategies, market analysis, and financial projections, is a crucial submission to demonstrate viability and repayment strategy.

Navigating the Approval and Funding Process

Once a complete loan application and all supporting documentation are submitted, the process moves into the underwriting phase. During underwriting, lender specialists review the application to assess the business’s creditworthiness, financial health, and the proposed loan’s risk profile. This involves verifying information and may lead to follow-up questions or requests for additional documentation.

For larger or more complex loans, the application may proceed to a credit committee review. This committee, composed of senior lending officials, evaluates the loan’s alignment with the lender’s risk appetite and lending policies. The outcome is either an approval or a denial. If approved, the lender issues a loan offer or term sheet, outlining the proposed loan amount, interest rate, repayment schedule, collateral requirements, and any specific conditions.

Upon acceptance of the loan offer, the process moves to loan closing, where all legal documents are signed. This includes the loan agreement, promissory notes, security agreements for collateral, and any personal guarantees. All conditions stipulated in the term sheet must be fulfilled before closing. Following closing, the loan funds are disbursed to the business, typically through a direct transfer to the business’s bank account.

After funding, businesses have ongoing responsibilities, including adhering to loan covenants, providing periodic financial reports, and ensuring timely repayment. These obligations allow the lender to monitor the business’s financial performance and ensure compliance with loan terms throughout the life of the loan.