A commercial loan is basically money borrowed from a bank, credit union, or private lender by a business (or sometimes an investor) to fund things like buying real estate, equipment, inventory, or covering operating costs. Unlike a personal loan or mortgage, it’s designed specifically for business use.
Here’s how it works step by step:
1. Application & Approval
- A business applies with a lender, providing financial statements, business plans, tax returns, and sometimes projections.
- The lender reviews credit history (both business and sometimes the owner’s), cash flow, collateral, and overall risk.
2. Loan Structure
- Principal: the amount borrowed.
- Interest: cost of borrowing, usually fixed or variable.
- Term: short-term (a few months to 3 years), medium-term (3–7 years), or long-term (up to 25 years for real estate).
- Repayment: usually monthly, with interest + principal, but some loans may have interest-only periods or balloon payments at the end.
3. Collateral & Guarantees
- Many commercial loans require collateral (real estate, equipment, inventory, or receivables).
- Lenders often ask for a personal guarantee from the owner(s), meaning they’re personally liable if the business can’t repay.
4. Funding
- Once approved, the lender disburses the funds as a lump sum or line of credit (similar to a business credit card, but larger).
5. Repayment
- Businesses repay over the agreed term. If they default, the lender can seize collateral or pursue legal action.
Example:
- A restaurant wants to expand and needs $500,000.
- The bank approves a 10-year loan at 7% interest.
- Monthly payment: about $5,800.
- The restaurant pays this each month until the loan is fully repaid.
👉 In short: a commercial loan helps businesses grow by providing upfront capital, but it comes with strict requirements, interest costs, and often personal risk for the owner.
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