Commercial Loans: Types, Requirements, Rates and How to Qualify
Commercial loans are business loans that are typically used to fund large investments. That can include everything from real estate to acquisitions and expansion. If you’re looking for a commercial loan, you’ll want to understand the eligibility requirements and how they work before applying. That can help you decide if it’s the right funding option for your business.
- A commercial loan might make sense if you’re financing a large-scale initiative and want to protect your cash reserves.
- Commercial loans and business loans function in the same way, but there are important nuances to consider.
- Underwriting usually focuses on business performance, creditworthiness, collateral and ability to repay.
What is a commercial loan?
A commercial loan is a form of business financing that provides capital that can help business owners secure a commercial mortgage, cover operational costs or expand new products or service lines. Commercial loans and business loans are often used interchangeably, but commercial loans generally refer to larger financing arrangements for established organizations. Business loans, on the other hand, are often geared toward small business owners.
Commercial loans can provide funding for small to midsize businesses, corporations, real estate investors, franchise owners and professional service firms. They can be used to:
- Buy commercial real estate
- Purchase equipment and vehicles
- Expand operations
- Fund construction
- Acquire another business
Commercial loan vs. business loan
There’s a great deal of overlap between commercial loans and business loans, but there are some important nuances that set them apart.
| Commercial Loan | Business Loan |
|---|---|
| Often used for larger financing needs | Can be used by businesses of all sizes |
| Typically requires stronger financials | May have more flexible eligibility criteria |
| Usually secured by collateral | Can be secured or unsecured |
| Common for real estate, equipment, expansion and working capital | Common for everyday business financing needs, including short-term financing |
| Generally offered by banks, credit unions, SBA lenders and online lenders | Offered by banks, online lenders, credit unions and alternative lenders |
How commercial loans work
Commercial loans are often structured as term loans that provide a lump sum of cash that must be repaid with interest over time. But commercial financing can also include lines of credit that unlock revolving capital as needed. Either way, some may require collateral to secure the loan, while others may require a personal guarantee.
In terms of eligibility criteria, commercial loan underwriting usually focuses on business performance, creditworthiness, collateral and ability to repay. Requirements are often stricter when compared to regular business loans. Having said that, term loans, lines of credit and SBA loans can all be considered commercial loans, but there are important distinctions to consider.
Types of commercial loans
Let’s unpack the most common types of commercial loans and what they can be used for.
Commercial real estate loans
This type of commercial loan can be used to buy, refinance, construct or renovate income-producing or owner-occupied commercial property, making it ideal for real estate investors or business owners seeking a commercial mortgage. That can include an office building, warehouse, retail space, mixed-use building, multifamily property or industrial space.
Best for: Businesses or investors buying, refinancing or improving commercial property.
Pros
- Can fund a major property purchase
- Longer repayment terms than other business loans
- Property often serves as collateral
Cons
- Requires appraisal and property documentation
- May require a hefty down payment
- Closing can take longer than other loan types
Equipment financing
Commercial loans can provide capital to purchase much-needed equipment. That can include machinery, vehicles, technology, restaurant equipment, medical equipment or other business assets. With equipment financing, the equipment itself often serves as collateral to secure the loan.
Best for: Businesses that need to purchase or replace revenue-generating equipment.
Pros
- Simplifies the collateral structure
- Preserves cash flow
- Can match repayment to asset use
Cons
- Funding is limited to equipment
- Equipment may depreciate over time
- Down payment may be required
Commercial auto loans
If your business needs to finance vans, trucks, delivery vehicles, company cars or fleet vehicles, a commercial auto loan might make sense. Like equipment financing, the vehicle typically serves as collateral.
Best for: Businesses purchasing vehicles for operations, delivery, transportation or sales teams.
Pros
- Protects your cash reserves and liquidity
- Offers potential tax benefits of owning a business vehicle
- Vehicle typically serves as collateral, though some lenders may also require a personal guarantee
Cons
- Insurance costs may be higher if your lender requires full coverage while the loan is outstanding
- Depreciation could cause you to become underwater on the loan
- Strict eligibility requirements, including strong financials and time-in-business requirement
Construction loans
A commercial loan can provide short-term financing for building or renovating a commercial property. Funds may be disbursed incrementally (in draws) as work is completed. At the end of construction, you can either convert the outstanding balance to a permanent commercial mortgage or refinance.
Best for: Businesses or developers financing new commercial construction or major renovations.
Pros
- Interest only accumulates on the amount drawn
- Protects working capital and liquidity
- Allows you to build a space that’s tailored to your business needs
Cons
- Interest rates usually outpace commercial mortgages
- May require a down payment up to 30%
- Total construction costs could be more than expected
Bridge loans
You can use a commercial bridge loan to get through a temporary funding gap. That can provide short-term financing to cover real estate transactions, property improvements, emergency costs or timing gaps between financing events.
Best for: Businesses that need temporary capital while waiting for long-term financing, a sale or another funding event.
Pros
- Can provide emergency short-term funding to keep your business afloat
- Funds may be available faster than other financing options
- If you’re using for real estate, eligibility criteria may be less strict than a commercial mortgage
Cons
- Interest rates may be higher than other business loans
- Short repayment terms can strain your budget
- Typically requires collateral, which could be at risk
Hard money loans
Hard money loans are short-term loans that use commercial property as collateral. They are issued by investors and private lenders instead of traditional banks. There usually isn’t a minimum credit score requirement. Businesses can use this type of financing to cover immediate gaps in cash flow until long-term financing comes in.
Best for: Businesses that own commercial property and need quick financing but aren’t able to qualify for a loan from a traditional bank.
Pros
- Often has a faster and simpler application process
- Quick access to funds
- May qualify with damaged or limited credit
Cons
- Interest rates are often on the higher side
- Short repayment terms can squeeze your budget
- May require a large down payment
| Loan Type | Best for | Typical funding speed | Collateral |
|---|---|---|---|
| Commercial real estate loan | Buying, refinancing or improving commercial property | 30 to 60 days | Yes |
| Equipment financing | Purchasing or replacing revenue-generating equipment | 1 to 3 business days | Yes |
| Commercial auto loan | Purchasing vehicles for operations, delivery, transportation or sales teams | 1 to 3 business days | Yes |
| Construction loan | Financing new commercial construction or major renovations | Funds are disbursed in stages (draws) predetermined by lender | Loan is secured by the land, not a finished structure |
| Bridge Loan | Unlocking temporary capital while waiting for long-term financing, a sale or another funding event | A few days to several weeks | Yes |
| Hard money loan | Businesses that own commercial property and don’t qualify for traditional financing | Several days or weeks | Yes |
Commercial loan rates and costs
Commercial loan rates can vary based on the lender, loan type, borrower qualifications, collateral and market conditions. Having said that, SBA loans often have competitive rates, but you can expect a more rigorous application process. It can also take time to receive funding.
Online lenders may charge more in exchange for faster funding or looser eligibility requirements. Your rate will ultimately depend on your:
- Personal and business credit scores
- Annual revenue
- Time in business
- Loan amount
- Loan term
- Collateral
- Industry risk
| Cost | What it means | When it applies |
|---|---|---|
| Interest rate | Cost of borrowing before some fees | Most loans |
| Annual percentage rate (APR) | Broader annualized cost including certain fees | Many loans |
| Origination fee | Fee for processing the loan | Some lenders |
| Appraisal fee | Property or asset valuation fee | Asset-backed loans |
| Prepayment penalty | Fee for repaying the loan early | Some term or real estate loans |
Commercial loan requirements
Regardless of the type of commercial loan you choose, you’ll need to meet the lender’s eligibility requirements. These can vary from one lender to the next, but the following factors will likely play an important role.
Credit score
Having a strong credit score can improve your chances of getting approved and securing a favorable rate and loan term. Your personal and business credit scores provide a snapshot of how you’ve handled your credit accounts in the past. Credit score requirements vary, but some online lenders may accept a lower score, with higher costs as the trade-off.
Revenue and cash flow
Lenders want evidence that the business is doing well and can repay the loan. That’s where your annual revenue comes in. This helps lenders gauge your business’s financial stability. Stronger revenue may improve your ability to qualify for a commercial loan.
Time in business
Established businesses usually have more options than startups. That’s because many lenders prefer to work with companies that have been in business for several years and have steady, reliable revenue. If not, it may be more difficult to secure a commercial loan.
Collateral
Collateral loans require an asset to back the loan. This reduces lending risk because if you default on your loan, the lender can seize the asset. Collateral can include real estate, equipment, vehicles, inventory, invoices or other business assets.
Debt service coverage ratio
This metric reveals whether your business’s annual income is sufficient to cover your debt payments (including interest). Lenders may consider this when you’re applying for commercial financing because it can help them gauge your ability to repay your new loan.
You’ll want to review typical lender eligibility requirements before applying. That can give you an idea of whether you’re likely to get approved. You might take steps to improve your credit or build up your cash reserves beforehand. When you feel ready, gathering the required documents and comparing lenders and loan types can help streamline the application process. Ideally, you’ll find a commercial loan that fits your financing needs and budget.
How to apply for a commercial loan
Every lender is different, but here’s what you can generally expect when applying for a commercial loan.
1. Determine why you need financing
Are you looking to purchase a new property or secure equipment? Or do you need working capital to cover operational costs or expansion? Your needs can guide you toward the right commercial loan.
2. Estimate how much you need to borrow
Avoid overextending yourself by borrowing more than you need or can reasonably repay. Review your budget and your financing needs to decide on a number that works for you.
3. Review your qualifications
Your personal and business credit scores will be important factors. Also focus on your annual revenue, time in business and collateral. Do you meet the general requirements for a commercial loan?
4. Compare lenders
Take time to shop around and compare APRs, repayment terms, funding speed, fees and eligibility requirements. That could save you money in the long run and help you find a lender that best meets your needs.
5. Gather documents
You’ll likely need recent tax returns, bank statements and financial statements. It’s also wise to pull up your business plan and legal documents.
6. Submit your application
Follow the lender’s instructions for submitting your loan application. SBA loans can take up to 90 days to process, but the timeline can be shorter with other types of commercial loans.
7. Complete underwriting
The lender will closely review your credit, cash flow, application documents and collateral to ensure you meet their underwriting requirements. They may come back to you with follow-up questions during this time.
8. Review the offer before signing
Be sure to review the APR, fees, prepayment penalties, repayment frequency and collateral requirements before signing. That can prevent surprises down the line.
9. Receive funds
Funding times vary based on the lender and loan type, but some commercial loan funds can be available in as little as one business day.
Where to get a commercial loan
Commercial loans are available from banks, credit unions, online lenders, SBA-approved lenders and certain nonprofit lenders. Here’s what you need to know.
Banks
Best for: Established businesses with strong credit and financials
Pros: Competitive rates, high loan amounts, long terms
Cons: Slower approval, strict requirements, more paperwork
Credit unions
Best for: Businesses that qualify for membership and want relationship-based lending
Pros: Potentially competitive rates, local service
Cons: Membership requirements, limited product availability
Online lenders
Best for: Businesses that need faster funding or flexible eligibility
Pros: Fast applications, quicker funding, broader credit acceptance
Cons: Higher rates and fees may apply
SBA-approved lenders
Best for: Businesses that can wait longer for competitive financing
Pros: Longer terms, government-backed options, strong fit for expansion or real estate
Cons: More documentation, slower timeline
Community Development Financial Institutions (CDFIs)
Best for: Underserved businesses, startups or borrowers who may not qualify with traditional lenders
Pros: Mission-driven lending, support services, lenient qualification criteria
Cons: Smaller loan amounts or limited availability
Pros and cons of commercial loans
Pros
- Can fund major business expenses
- May offer higher loan amounts than personal financing
- Can help build business credit
- Wide range of loan types available
- May preserve ownership compared with equity financing
- Some options offer long repayment terms
Cons
- May require strong credit and revenue
- Collateral or personal guarantee may be required
- Fees can increase total borrowing cost
- Approval can take time, especially for bank or SBA loans
- Missed payments can damage credit and put assets at risk
Alternatives to commercial loans
Commercial financing isn’t for every business owner. If it isn’t the right match for you, consider the following alternatives.
- Business credit cards: This can provide funding on an as-needed basis. With business credit cards, you’ll only owe interest on the amount borrowed.
- Invoice factoring: This allows you to sell your unpaid invoices to a factoring company in exchange for a fee. In this way, invoice factoring works like a cash advance.
- Revenue-based financing: This option unlocks a lump sum of cash that you’ll repay with future sales. You can expect a fixed factor rate.
- Equity financing: With this financing option, you’ll sell ownership shares of the company in exchange for capital. You won’t have anything to repay but you’ll lose part of your equity position.
- Crowdfunding: Crowdfunding allows interested parties to invest cash in or donate to your business, sometimes in exchange for equity, profit-sharing or products or services.
- Business grants: These can provide free funding that doesn’t have to be repaid. Small business grants are available through businesses, associations, foundations and federal and local governments, but securing them can be highly competitive.
- Personal loans for business, with caution: These are often easier to qualify for, but you’ll be putting your personal finances at risk. Personal loans for business are best for those with strong credit and a clear plan for repaying what has been borrowed.
- Friends and family financing, with caution: Borrowing from friends and family is another option, but it could jeopardize your relationship if you can’t repay the loan.
How to choose the right commercial loan
Not all commercial loans are created equal. It’s wise to do your homework to find the best financing option for your business. Consider the following factors:
- Loan terms and repayment timelines
- Interest rates
- Funding times
- Fees
- Qualification guidelines
- What the loan can be used for (e.g., equipment, vehicles)
- Lender reviews
- Whether collateral is required
- If your budget can reasonably absorb the new loan payment
Frequently asked questions
There isn’t an official definition, but commercial loans are often business loans that are used to finance a large-scale initiative. That can include purchasing real estate, equipment or vehicles or expanding operations.
Commercial loans and business loans are essentially the same thing, but commercial loans are typically used by larger organizations with heavier financing needs. Commercial loans generally have stricter eligibility criteria.
It depends on the lender and loan type. Some lenders evaluate both personal and business credit, while asset-based real estate lenders may place more weight on the property, cash flow, equity and the borrower’s experience. SBA and lender underwriting policies also vary by program, so there is no universal minimum score for a commercial loan.
Funding times vary based on the loan type and lender, but it could take anywhere from one day to several months.
It’s possible to refinance a commercial loan, assuming you meet the new lender’s eligibility requirements. That could allow for a lower monthly payment, but you may need to account for fees and potential equity and credit requirements.
Compare business loan offers