Types of Commercial Loans

Types of Commercial Loans

Both commercial banks, as well as private lenders, offer a multitude of options for businesses to utilize loans in order to make the business a success. There is a variety of sources for commercial loans ranging from credit unions to a commercial hard money lender. Some commercial websites and apps even offer a portal to allow participating lenders to receive and bid on your commercial loan application. With the large array of commercial loan products available, it’s important to understand what best fits your needs. Commercial real estate acquisitions can be complicated and utilizing a trusted third party firm to finance the purchase is a key component of being successful in investing. Commercial real estate term loan products commonly found are a bridge loan, permanent loan, mini permanent loan, 7A loan, and a 504 loan.

A bridge loan is usually utilized as a temporary and instant way for a borrower to access cash flow to finance a business or project while long-term financing is being qualified for and obtained. Private lenders typically offer bridge loans, however in order to qualify proof of income and excellent credit must be provided. The normal term of a bridge loan is between 1 to 5 years, but the price of financing can be high with an interest rate anywhere from 10 to 20 percent. 

A permanent loan is the most commonly known, as this is a conventional product that offers long-term commercial real estate financing from a banking institution. The term usually ranges between 15 to 30 years and offers near-prime to prime interest rates. This type of loan does take a longer timeframe for approval and can be difficult to qualify for.

The mini permanent loan, otherwise known as mini perm is conventional, short-term financing from a bank for commercial real estate.  Similar to a permanent loan offering prime to near-prime interest rates, the criteria for qualifying can be strict. The goal of this type of loan is to make a property income producing so at first in the qualifying process a positive net operating income does not need to be demonstrated. Long-term financing will need to be secured before a mini permanent loan reaches maturity as the normal term is anywhere between 1 to 5 years.

An alternative financing option is the 7A loan that can be utilized for commercial real estate, working capital or equipment. The U.S. Small Business Administration can certify either a non-bank or bank lender to issue this type of loan that is utilized by small businesses. The 7A loan can be utilized at times when someone may not fully qualify for a conventional bank loan. The term can range in length with a maximum of 25 years allowed and a normal interest rate varying between 6 to 10 percent.

The 504 loan type serves as an alternative funding source for commercial real estate or heavy equipment. A bank or non-bank lender certified by the U.S. Small Business Administration can issue this to small businesses who occupy or own 51 percent or more of a commercial property. The rates range between 6 to 10 percent with a term varying between 10 to 20 years.

A variety of short-term commercial business loans are also available ranging from a line of credit to an accounts receivable loan. The type of loan product needed will vary from one individual situation to the next as property type, size of the loan and other factors all influence the commercial loan type.