What is Commercial Lending?
Commercial lending is the practice of banks and financial institutions providing debt-based financing to businesses to fund major capital expenses.
It provides businesses with the financial resources to grow, offering solutions like working capital loans, equipment and asset financing, and real estate or facility expansion. These lending options help businesses bridge financial gaps and scale efficiently.
Commercial loans support various industries—from construction and medical practices to charter schools and small businesses—and play a vital role in economic growth.
It is the most important tool for helping business owners or private equity groups fund their entrepreneurial ventures. But what types of commercial loans are there, and how does the process work?
What are the different types of commercial loans?
Commercial loans are not a one-size-fits-all funding tool. Once a specific business plan is determined, an individual or group can explore several commercial financing options that suit them best. Here are some of the different types of commercial loans.
Equipment financing
Whether it’s heavy machinery or office supplies like computers, furniture, and software, equipment financing covers what’s needed for your business equipment.
SBA loans
Small Business Administration loans come with a federally backed guarantee, flexible terms, and competitive variable rate options.
Commercial real estate loans
Businesses seeking to acquire or develop properties such as office buildings, retail centers, and industrial parks can get financing through a commercial real estate loan.
Commercial construction loans
If your business has plans to build, a commercial construction loan can provide the funding for land acquisition, labor, materials, and other related expenses.
Bridge loans
A short-term financing option, a commercial bridge loan is typically used for a time-sensitive real-estate opportunity. Unlike other business loans, this financing is used to get the borrower through in the short term until a long-term financing solution is needed.
Other commercial lending options include:
Conduit loan
SBA 504 loan
Mezzanine loan
Permanent loan
What is the commercial lending process?
The commercial lending process typically begins with discussions between the borrower and the lender. These conversations help assess the borrower’s financial needs and potential loan options.
At some point, businesses will then submit a loan application, which may include details about collateral, business plans, and a comprehensive breakdown of financial information.
Once the application is submitted, the lender generally conducts a thorough review. Some of the categories assessed during the review include the viability of the borrower’s business plan, creditworthiness, and financial history. It can also include interviews, site visits, and viewing financial statements.
The lender then decides whether to approve the application. If approved, the borrower receives details about the loan terms, interest rate, and repayment structure.
Once an agreement is reached, the loan is complete, and the borrower receives the funds.
Here’s what to consider with commercial loans.
Length: During the negotiation process over loan terms, the borrower has several things to consider before agreeing to the terms. The typical length of a commercial loan ranges between five and 20 years, but it can also be less than five years.
Interest rate: Interest rates are affected by the length of the loan. If the loan takes longer to pay off, it will come with a higher interest rate.
Collateral: The borrower pledges assets as collateral, including real estate, vehicles, equipment, and business inventory. The amount of collateral required depends on several factors, including the borrower’s credit score.
Fees: Factor in fees with your loan, such as origination fees, commitment fees, and title insurance. Origination fees often range from 0.5% to 1%, and commitment fees from about 0.25% to 1%. Other types of fees can apply, depending on the type of loan.
Commercial lending propels business growth.
Most businesses need financial help scaling and funding operational costs. Commercial lending is the practice of financial institutions providing debt-based funding to businesses for large capital expenses.
Ready to start or expand a business? Contact a lender at Axos Bank to determine which commercial loan is best for your needs.