What’s the Difference Between a Business Loan and a Commercial Loan? – A business loan and a commercial loan are both financing options that are offered by banks and other lenders, so you may find yourself asking the question what’s the difference between these two?
Fortunately, the answer isn’t too complicated. Read on to learn more about the differences between a Business Loan and a Commercial Loan, including how each one works and which type of business would be best served by each option.
A business loan:
- Whether you need capital to expand your business, or simply want to finance an upcoming purchase, business loans are typically structured as either short-term (usually one year) or long-term (five years).
- Commercial banks and credit unions typically offer these types of loans. As with home loans, commercial loans typically require property as collateral.
- The more valuable your business’ assets are, and the better your credit score is—which will help get you approved for financing—the lower interest rates you can negotiate.
- Interest rates on business loans tend to be higher than those offered on personal loans because they carry a higher risk of default.
- If you fail to make payments on time, your lender may take control of your company’s assets.
A commercial loan:
- When businesses need funding for large purchases such as real estate or equipment, it’s often easier to obtain funding through a loan from a financial institution that specializes in lending money to businesses rather than from a bank that offers consumer products and services like mortgages and credit cards.
- These lenders generally provide longer terms at lower interest rates than traditional banks do because they can spread their risk across multiple borrowers in various industries instead of putting all their eggs in one basket by lending money to just one person or company.
- Typically, commercial loans have higher balances than business lines of credit do. You might take out one to purchase a new building, expand your manufacturing capabilities, or buy major equipment.
- A commercial loan is secured by an asset (the building, machinery, or stock), rather than just by your personal credit history.
- Typically, you can expect interest rates between 4% and 12%, though they can be higher depending on things like risk factors (like collateral) and if you’re paying points on top of that rate to get lower payments over time.
Business Line of Credit Loan
A business line of credit: A line of credit lets you borrow money from your bank when it’s needed—and pay it back when funds aren’t tight—so it’s not quite as formalized or restrictive as other types of financing. Your bank might require collateral for a commercial loan, but it won’t ask for security with a line of credit unless there’s been some kind of problem making payments in the past.
Size of loan
The process of applying for a business loan is typically much quicker than applying for a commercial loan.
There are many business loans that can be secured in less than 30 minutes with little paperwork, while commercial loans may take weeks to complete.
The application process will vary from bank to bank, but it’s likely to involve submitting personal information about your business such as income statements, tax returns, financial statements, and other documents.
Approval usually takes place within 24 hours if all documentation is submitted correctly. It’s important to note that there are many different types of business loans available; factors such as collateral, industry type, and the amount sought will all play into what type of loan you qualify for.
Income Requirements
When you’re trying to obtain funding for your business, it can be tempting to think that any type of loan might do. But different types of business loans have different criteria, which can impact their affordability.
A commercial loan also referred to as an acquisition or asset-based loan, is more focused on your ability to repay than it is on what you’ll use the money for.
This means it will likely require better credit and may take longer to process than an SBA loan. And because these loans are based on collateral, they typically come with higher interest rates.
In contrast, a traditional business loan focuses less on what you need and more on how much cash flow you bring in. As such, it often comes with lower interest rates—and there’s no collateral required.
However, if your company isn’t generating enough income to cover its expenses (or if you haven’t been operating long enough), then it may not qualify at all. To learn more about how each kind of financing works—and whether one could work for your business—check out our guide: What Is a Business Loan vs Commercial Loan?
Collateral Required
In commercial loans, collateral is something that can be taken if you fail to make payments. It is usually an asset, such as real estate or personal property (such as an automobile or boat).
The lender can take your collateral if you don’t pay what you owe. If no collateral is offered, but a borrower has strong credit and plenty of income, a secured loan may be possible.
In order to secure your loan, the lender will ask that you put up your own property—such as real estate—as collateral until all your loans are paid back in full.
Unsecured business loans have no collateral requirements at all; however, they do require excellent credit to qualify for them, as they are considered high-risk by lenders due to their lack of security. Lenders like unsecured loans because they tend to be repaid on time.
How Long Does it Take to Get a Loan Approved?
Once you’ve gathered all your information together, most lenders process applications within 24 hours, though some may take longer than others depending on how quickly paperwork can be processed and verified.
If everything checks out with your application, approval should come through relatively quickly, usually within one business day from when your application was first submitted. Some banks allow online account access where you can check on the status of your loan application online without having to call anyone for an update.
Application Process
If you’re looking for help starting or running your business, it’s possible that you might need financing. You might be wondering whether you should apply for a business loan or a commercial loan.
As you likely know, business loans are obtained from financial institutions while commercial loans are obtained from other businesses. Here is what you should know about these two types of loans and how to determine which option is best for your business needs.
While some lenders will lend to either businesses or individuals, most lenders specialize in one type of loan over another; make sure that your lender specializes in what you need before applying for financing.
