A Quick Guide to Choosing the Right Commercial Lending Solutions

If you own a business, there will likely come a time when you need some extra funds for purchasing new equipment, expanding to a new location, making renovations, adding inventory, or even improving cash flow. Fortunately, there are several different commercial lending solutions available through financial institutions like Riverview Bank to help you out. 

Depending on your needs, some lending products might work better for you than others. So how do you choose the right commercial lending solution? We’ve put together this quick guide to help you understand your options, some of the most important factors to consider, and common mistakes to avoid.

What Do You Actually Need?

The first step is to assess your business needs. How much money do you need? What will you use the funds for? Is it a one-time need, for ongoing expenses, or a long-term growth investment? How quickly do you need the funding? These factors can have a direct impact on the type of loan or financial product you should seek.

For instance, if you are making small purchases like new office furniture or marketing materials, you might be just fine getting a line of credit. Business credit cards are great for ongoing travel needs. Getting ready for a major renovation or expansion project? You’ll probably be better off with a term loan.

Once you know what you really need, you’re ready to start exploring the lending options out there.

What Are Your Main Lending Options?

With a term loan, the borrower gets a lump sum of cash under specific borrowing terms. Interest rates can be either fixed or variable, but the borrower agrees on a set repayment schedule, which means they will make predictable payments over a certain period of time. Terms can be as short as less than a year or as long as 25 years. While interest rates are often low with term loans, borrowers should carefully consider their long-term repayment ability.

Term loans are usually best for large, one-time expenses, such as buying a new building, expensive equipment, or other major purchases.

Business Line of Credit

If your business has ongoing working capital needs or cash flow gaps, a business line of credit might work well. Similar to a credit card, a line of credit provides access to a pre-approved amount of money. Businesses can borrow what they need (up to the limit) and only pay interest on the amount they’ve used. This flexibility is excellent for the management of daily or monthly operational expenses.

One thing to keep in mind is that a business line of credit will likely have a higher interest rate than a term loan and might require stronger creditworthiness.

Small Business Administration (SBA) Loan

The Small Business Administration is a government agency that exists to support small business owners and entrepreneurs by partnering with lenders to reduce their risk and give borrowers easier access to capital. SBA loans are government-backed and generally offer more favorable terms, such as better interest rates, lower down payments, and longer repayment options.

Based on your eligibility and needs, the amount you borrow can range from $500 to $5.5 million and can be used for a variety of purposes, including working capital, equipment financing, acquiring real estate, renovations and construction, and more.

Although there are many benefits to SBA loans, the application process can be quite lengthy, and there are strict eligibility criteria you must meet, including that your business is for-profit and is located and does business in the United States. You also must be creditworthy enough to assure loan repayment and unable to get a similar loan for reasonable terms from a non-government-backed source.

Commercial Real Estate Loans

If you are interested in purchasing, developing, or refinancing land or a building for your business, a commercial real estate loan might be best. A permanent real estate loan works much like your home mortgage but is used for commercial properties. You can usually find fixed or adjustable interest rates, and repayment terms can be as few as 5 years or as long as 25 years.

Although there are some tax benefits and you can build equity with this type of loan, larger down payments are often required (20 to 30 percent of the purchase price). Plus, interest rates tend to be higher (10 to 20 percent), there might be a longer approval process, and a property appraisal is usually necessary.

Business Credit Card

Sometimes, your business might just need to make small purchases like office supplies or lunch for potential clients. In these cases, having a business credit card gives you flexible, easy access to the funds you need without an arduous application process.

As with a personal credit card, you get the benefit of building credit for your business when you make regular monthly payments. Interest rates might be higher than with a term loan but will only be a factor if you do not pay your balance. Also, your spending limit might be lower with a business credit card than with a line of credit, which is why it’s best for small purchases.

Are You Eligible?

Several factors can affect your eligibility when applying for a commercial lending solution. Most lenders prefer businesses that have been in business for a minimum of 1 to 2 years. They might also have some requirements related to annual revenue or collateral availability. It’s a good idea to check both your personal and business credit scores before applying as well.

Common Mistakes to Avoid