How to Get a Commercial Loan

If your local bank can’t facilitate a commercial loan with favorable terms, or at all, it could spur you to try commercial (“alternative”) lenders for the first time. That’s not a bad thing, it’s just a fact of life in business. Commercial lenders fill in the gap where the big banks often cannot due to company policies. When faced with this situation, you’ll need to know how to get a commercial loan, as well as the various types available.

But first, why are commercial lenders different?

How commercial lenders see business loans differently

First off, commercial lenders don’t stop short so quickly due to the risk or detail of the loan. Commercial lenders are usually far more flexible and adaptable to your situation than a bank may be, and a commercial lender is more likely to approve your loan deal even if every bank you’ve asked couldn’t.

So how do commercial lenders cover the loans that banks can’t? First of all, these are typically debt-based funding arrangements between the borriowing business and the lender. These funds can be used to expand operations, including financing a major business purchase of almost any kind. The interest may be higher, but commercial lenders are also motivated to use government loan programs and may have good relationships with program contacts that will consider all the possibilities before rejecting a loan.

12 Common Commercial Loan Types

All of the following are commercial loans (loans made by commercial/alternative lenders).

  1. Permanent Loans– A typical permanent loan is simply a first-time mortgage on a commercial property.  To qualify as a permanent loan, however, the loan normally is required to involve amortization. The term of the loan also must be no less than five years. This is the most common commercial business loan.
  2. Takeout Loans– A takeout loan is simply a permanent loan with the loan proceeds used to pay off a construction loan principal. The balance is shifted from one loan to the other.
  3. Bridge Loans– This is a short-term first mortgage on a commercial property. While this loan is essentially a term anywhere from six months to three years, the interest rate on a bridge loan is often considerably higher than the average permanent loan.
  4. SBA Loans– Guaranteed by the Small Business Administration, loans to users of commercial real estate are written by private companies, such as banks and alternative lenders.  These small business loan guarantees were insitituted by Congress to promote small businesses and a competitive and fair-lending environment in the marketplace.
  5. SBA 504 Loans– This program uses a conventional, fixed-rate, first mortgage loan and then adds a 20-year fully-amortized, SBA-guaranteed, second mortgage. It’s actually the most commonly-available fixed rate SBA loan type.
  6. SBA 7(a) Loans– Somewhat similar to the 504 SBA Loan, the SBA 7(a) program is a 25-year, fully-amortized, first mortgage loan, but with a floating rate which is directly tied to the current Prime Interest Rate.
  7. SBA Construction Loans– SBA construction loans are often created by SBA lenders by writing conventional construction loans that convert automatically to 25-year SBA loans upon completion.
  8. Conduit Loans– The conduit loan is a large permanent loan on a typical commercial property, underwritten according to the secondary market guidelines. These loans carry a large prepayment penalty to assure profit margin on the loan interest. Such loans normally have very low interest rates, since the profit margin is assured. Such conduit loans are usually bundled into pools and then securitized to become commercial mortgage-backed securities.
  9. Commercial Construction Loans– A 1-2 year loan created to allow for the building of commercial properties. The proceeds of such a loan are tightly controlled by the lender in order to make sure they are only used in the construction of the new building. There are obviously going to be penalties, including potential default. For intentiaonally misuing this type of loan as a borrower.
  10. USDA B&I Loans– This loan program is run by the Department of Agriculture’s Business and Industry department. Like the SBA loan program, it allows a conventional lender to issue the loan, but the USDA guarantees the majority of the amount. These USDA Business and Industry loans were initiated in order to encourage job-creation in the more rural areas of the United States.
  11. Fix / Flip Loans– Renovation loans similar in nature to typical construction loans, and as the name implies, are made for “flipping” properties. In essence, this type of loan allows a real estate investor to acquire property with enough additional proceeds to renovate the property for a speedier sale. The lender looks at both the property within the context of the surrounding market and the investor’s own financial profile more closely on this type of loan.
  12. Hypothecations– A hypothecation is a more unusual type of business loan, since it is in fact a personal property loan, secured by a note and mortgage owned by the borrower.  The note and mortgage are most typically created when the borrower sells a real estate property and refinances. The borrower may always pledge the mortgage receivable for cash.

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15 thoughts on “How to Get a Commercial Loan

  1. Despite the high-interest rate associated with the bridge loan, I still value its use as a result of the return it provides after a good property investment. Great read. Thanks.

  2. The SBA loan is considered to be one of the most important decisions taken by Congress to assist small businesses. I really detest the stringent conditions placed by some financial institutions on small businesses

    1. Yes, we need more small business empowerment. It is a difficult business to regulate and promote small business simultaneously. Thanks for the comment, Catherine!

  3. I love the introduction of Flip loans. It really does give you a break when you intend working on some commercial properties that would bring great returns in the future.

  4. Can I secure Flip loans for rental properties that are just below 2 years? The rate at which houses on rent suffers damage is really alarming.

    1. Hi Rachel,

      It really depends on the situation. Other positive factors can help, like evidence of expected return. We help people in such situations to find those loopholes whenever possible and are always open to hearing about new situations like yours!

  5. Wow! Never knew about the possibility of securing a loan faster with a commercial lender. I’ve always had the idea of working solely with banks. Nice read. Thanks for the post.

  6. Thanks for sharing this article. True, you do not need to have a perfect credit score to be eligible for a short term loan with bad credit. Customers with poor credit may still qualify for a loan.

  7. For commercial loans, I had always thought that there were only a few options as opposed to the twelve you listed here. If I were to buy some commercial property, I would probably look for a permanent loan. The reason why is that the term of it would be more than the five-year minimum stated.

    1. That’s certainly an option. My own experience is that there are many ways to handle a commercial property loan since many businesses have differing assets at their disposal. We try to look at things like factoring of accounts receivable and even balance transfers in some cases to make room for the loan on paper. Typically, a business has more value tucked away than they think, and it’s often all they really need to grow on.

  8. Extender crédito comercial es más complejo de lo que implica su definición. Existen múltiples propósitos, consecuencias y riesgos del crédito comercial. Ofrecer crédito comercial implica entregar una mercancía a riesgo de un incumplimiento de pago, es decir, con riesgo de crédito.

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