Funding is the lifeline of every business. As an entrepreneur, you need to identify if and when your business needs a commercial loan to boost its operations.
You also need to know the type of commercial loan appropriate for your business’s financing needs. Once you do that, you’ll be confident when approaching a lender for a commercial loan, whether it’s a business loan, asset financing, or a working capital loan. Let’s learn more about commercial loans.
What Is A Commercial Loan?
A commercial loan is a funding agreement between a business (the borrower) and a financial institution (the lender). Companies ordinarily use the debt-based funding model for significant capital investments or operational expenses that the business may not afford from its daily cash flows.
The lender advances funds to the business if the borrower agrees to comply with the conditions of the loan that stipulate the lending rate, repayment dates, and more.
Typical Business Uses For Commercial Loans
1-. Acquiring commercial property
Few small businesses can afford to pay for a property upfront. Many business owners will rely on commercial real estate loans to purchase commercial space for their businesses.
2-. To support working capital
From time to time, many small businesses may experience funding gaps. This occurs when you need to make payments for inventory or utilities, but the cash at hand is insufficient. This happens when you’ve sold goods on credit and are awaiting payments from your clients. That’s when you need a working capital loan.
3-. To purchase equipment
With equipment financing from lenders, you can acquire or replace the machinery you need to boost production. Whether it’s technical equipment, construction tools, or medical equipment, getting an equipment financing loan makes it possible for businesses to acquire assets they couldn’t afford.
4-. To purchase automobiles
Logistics companies regularly reach out to banks for commercial auto loans to finance new vehicles to grow or replenish their fleet.
5-. To expand your business
Business expansion is exciting but costly. You may want to open a new store, diversify to an online store, or introduce a new product. A term loan helps businesses meet their expansion budgets.
6-. To construct or renovate commercial properties
When businesses need to put up commercial properties or significant property renovations, they turn to commercial construction loans. Commercial construction loans enable businesses to develop properties from scratch, unlike mortgage loans that support the purchase of existing properties.
7-. To build up inventory
Businesses may seek inventory financing to stockpile inventory in anticipation of a high season or take advantage of manufacturers’ bulk purchase discounts.
Why Does Your Business Need A Commercial Loan?
As a business owner, growth is a top priority for your business. However, you need money to achieve meaningful growth.
There are three main funding avenues to support your business growth ambitions:
- Plowing back your profits into the business; the cheapest method but can be very slow.
- Raising equity by pumping in more capital or reaching out to new shareholders; can quickly dilute your share in the business if other shareholders significantly raise their stake.
- Seeking small business loans to boost your business expansion; finding willing conventional or digital lenders to advance you a range of commercial loans such as working capital loans.
From these three options, many small business owners will prefer commercial loans.
That’s because when lenders offer your business financing, they do not claim a share of the business, nor do they interfere with the decision-making processes of the business.
How To Know If Your Business Needs A Commercial Loan
- A funding gap that you constantly grapple with as your cash at hand is unable to cover the operational needs of your business.
- If your business is overdue for expansion, then it’s time you consider borrowing. The need could be to increase inventory massively, move to a bigger store, or open an online shop.
- When there’s a need to acquire new assets or replace old ones with more efficient machinery.
- The need to purchase new vehicles to boost an aging fleet or add more unique units.
- Being passed by emerging opportunities in the market such as supplying a huge order that’s profitable. A commercial loan would position you to satisfy such markets and quickly improve your bottom line.
- You need to move into bigger premises to be able to serve your growing market
Consider seeking financing to take advantage of available opportunities to expand your business.