Advantages and Challenges of Commercial Loans

December 14th, 2020

Obtaining a commercial loan can be the right financial solution for small business owners who are intending to expand their operation or for entrepreneurs planning to start a new venture and need cash for their next project. Generally, the funds borrowed through a commercial loan must be used for the purchase of existing real estate property as office buildings, warehouses, retail premises, construction of new commercial property, renovation, long term equipment purchase or other modernizations that will improve the company’s performance and will generate cash flow. Additionally, the loan can be granted for working capital needs, debt refinancing or a new business start-up costs and the borrowing is secured by a commercial real estate property.

Business owners should take the decision to choose a commercial loan among other lending options after a careful consideration of the pros and cons associated with this type of credit.

Advantages of Commercial Loans

Lowest Interest Rate

Commercial loans have the most favorable interest rates compared to other business borrowings. Applicants should expect the offered mortgage interest to fluctuate between 5 % and 8 % as the interest rate generally depends on the size and the term of the loan.

Longer Loan Terms

The term of a commercial loan can vary from three to ten years, which allows a smooth payback process and reduces the chances for default as business owners have more time to be working towards increasing company’s profitability and repaying their obligation in full.

Large Cash Amounts Access

Commercial loans can provide access to large amounts of cash and enables the borrower to retain a complete ownership of the business. All anticipated costs of the business project can be incorporated in just one loan which will further save the Borrower time and money as servicing separate credits can be expensive and time consuming.

Challenges of Commercial Loans

Extensive Paperwork/Application Process

The strict qualifying requirements of commercial loans makes the application and approval process more complex compared to those of other financial services as private money loans or fix and flip borrowings for instance. Most lenders require extensive paperwork prior to proceeding to an appraisal of the real estate property that will secure the loan. Besides a completed 1003 form, purchase and sale agreement (if applicable), a preliminary title report for the real estate property that secures the loan and the borrowers’ credit score report, the lender will need the following documents to be attached to the submission package so the loan can be funded smoothly: two years of company’s operating statements for existing entities, rent roll, commercial leases, occupancy certification, 3 moths bank statements.
Thus, it can be difficult for a start-up business to qualify for a commercial loan.

Credit Score

Yes, it really matters. As mentioned above, your credit history, including credit score matters and banks will check on it. So if you haven’t had the chance to build a credit history yet or for some reason there are defaults recorded, most likely your application will be denied.

No Flexibility

Investors require detailed accounts of how the funds will be spent prior to approving the deal, which means that the borrower must follow diligently the initial business project costs approved. If any other than the outlined in the business plan expenses occur or unusual market shifts are present, the borrower may be facing certain difficulties.

The Universal Commercial Capital’s focus is on finding the best financial solution for your business needs. Please contact us to receive a free estimate.