Here’s a clear breakdown of how commercial loans work:
1. Purpose
Commercial loans are designed for businesses rather than individuals. They’re typically used for:
- Buying commercial property (office, retail, warehouse)
- Expanding or starting a business
- Purchasing equipment or inventory
- Refinancing existing business debt
2. Loan Types
Some common commercial loan types include:
- Term Loans: Fixed amount borrowed, repaid over a set term (often 3–25 years).
- SBA Loans: Partially guaranteed by the U.S. Small Business Administration; lower risk for lenders.
- Lines of Credit: Flexible access to funds up to a credit limit; pay interest only on what you use.
- Commercial Real Estate Loans: Specifically for purchasing or refinancing property.
- Equipment Financing: Used to buy machinery or other business assets.
3. Application & Approval
To qualify, lenders usually review:
- Business financials: Profit & loss statements, balance sheets, cash flow.
- Credit score: Both business and personal (higher scores improve chances).
- Collateral: Property or assets to secure the loan.
- Business plan & experience: Especially for new businesses.
Approval is generally harder than for personal loans because commercial loans are higher risk.
4. Repayment Terms
- Principal + Interest: Most loans require monthly payments.
- Amortization: Some loans pay both principal and interest over the term.
- Balloon Payment: Some commercial loans have smaller monthly payments with a large lump sum at the end.
- Variable vs Fixed Interest: Rates can be fixed or fluctuate with the market.
5. Deposit / Down Payment
- Typically 10–30% of the property or loan value.
- Some specialized programs may allow low or zero down, but those are rare and often stricter.
6. Key Differences from Personal Loans
- Higher loan amounts.
- Shorter or more varied terms.
- More documentation required.
- Often backed by business assets, not personal credit alone.
Read more about commercial loan for new business
💡 Bottom line: Commercial loans are essentially a way for businesses to access larger sums of money than they could on their own, with repayment structured to match the business’s cash flow. The lender takes on more risk, so qualifying requires stronger financials than a personal loan.