Commercial Loans

There may be times when a business owner may require access to additional working capital to meet their business needs or goals. A common option to fill these financial gaps is to secure a commercial loan.

A business might use commercial loan financing to hire and train staff, increase inventory, purchase equipment, or launch new marketing promotions.

What is a commercial loan?

A commercial loan is any loan or line of credit extended to a business rather than a consumer or individual. Commercial loans may range from short-term (30 days to 1 year) to long-term (15 to 30 years) and could be secured or unsecured. Unlike with personal loans, traditional lenders usually require commercial borrowers to submit extensive financial statements and maintain insurance on the financed items.

How do commercial loans work?

Commercial loan lenders can provide a lump sum of funds that the borrower pays back with interest over a set period, or extend a line of credit, under which the borrower only pays interest on the portion of the loan used.

Business owners may apply for commercial loans with banks and credit unions, the U.S. Small Business Administration, online lenders, and certain community-based nonprofit organizations. To qualify for a loan with a traditional lender, the applicant needs good personal credit, and often the business has to be at least two years old and generate a minimum of $50,000 in annual revenue. While the commercial loan application process varies by lender and loan type, it usually requires applicants to provide bank statements and tax returns (both personal and for the business), as well as balance sheets, profit and loss statements, and information on collateral, if needed.

Do commercial loans require collateral?

Collateral is an asset (like real estate, inventory, or equipment) that borrowers pledge to secure a loan in case they fail to pay it back. Lenders may require collateral for commercial loans to mitigate risk should a borrower default. The amount of collateral may depend on a borrower's credit history, current revenue, capacity for repayment, and loan terms.

However, not all commercial loans require collateral. Some online lenders might issue unsecured loans to borrowers with high credit scores and whose businesses have cash reserves on hand. These loans can have higher interest rates.

How do lenders determine commercial loan rates?

A commercial loan rate reflects the financial background of the business seeking the funding. Lower interest rates may be granted if:

• The applicant has good personal and business credit scores
• The business has a track record of strong annual revenue
• Collateral is required and the loan-to-value ratio is low (the loan is low compared to the value of the collateral)

Other factors that impact commercial loan rates include prime rates set by the Federal Reserve, the length of loan term (shorter term loans usually have lower interest rates because they get paid off sooner), and the risk associated with the type of commercial loan.

Why should I get a commercial loan?

Any business could benefit from having an ongoing source of funding to keep things running smoothly and profitably. Some specific examples of ways a business may benefit from a commercial loan include:

• Upgrading office technology
• Purchasing equipment
• Creating a new marketing campaign
• Hiring additional employees

Whether a business owner is seeking a commercial line of credit or a loan, it's important they identify and look for the features they care about most. Commercial loans likely vary across lenders, so business owners should be sure they find the financing that fits their needs.

American Express offers the American Express® Business Line of Credit, and you can click here to learn more. Note that the American Express Business Line of Credit may have different eligibility criteria, terms and features from the lending products that are discussed above in this article.