Today, it’s easier than ever to get a loan. However, this has led to an increase in the number of loan applicants who are looking for loans without fully understanding the implications. As a result, more and more commercial lenders are becoming wary of lending money.
Many banks and other loan providers are now requiring borrowers to fill out detailed application forms before they will even consider issuing loans. If you want your business to grow and you need a loan to do so, you need to understand the risks before committing to an application. Here are 8 things you need to know before applying for a commercial loan.
Know the Different Types of Loans
There are a variety of different types of commercial loans. You can choose the type of loan that best fits your business needs and your lenders’ requirements.
- Operating Line of Credit (O LOC): This loan is designed to fund day-to-day operations while minimizing the impact on the credit worthiness of the business. An O LOC loan is usually best for ongoing operations, like paying employees or keeping the facility up and running. There is usually a restriction on the amount that the business can draw from the loan.
- Term Loan: This loan is typically used to fund large acquisitions, like buying another company or buying a piece of real estate. Term loans generally come with high-interest rates and high fees.
- Bridge Loan: A bridge loan is a short-term loan that is used to bridge the gap between two longer-term loans. Unlike a bridge loan, a home equity loan is not a secured loan and is used for a variety of purposes, like paying for school or expanding the business.
Understand the lenders’ requirements for commercial loans
Lenders will generally want to understand the purpose of a commercial loans and why you need it. Lenders will want to know why you need the money, why it’s needed now, and why it’s needed for expansion or acquisition.
You also need to be able to provide documentation that proves the funds are needed and that you can repay the loan. Before you even think about applying for a commercial loan, make sure you have a compelling business case. You need to be able to show lenders that your loan application fits within the company’s overall plans and why the loan is needed to further those plans.
Understand the lending criteria for a commercial loan
All commercial loans are evaluated and approved or denied by a lender using some factors. Most commercial loan providers want to make sure the loan is worthwhile for the lender. The loan provider will want to make sure the revenue from the loan repayment can cover all expenses from the loan and that there are no losses.
Is a secured or unsecured loan better?
Simply put, a secured loan is when the lender provides collateral to the creditor to get the funds. This means the creditor will get their money back if you do not pay the loan.
Therefore, a lender can approve the loan regardless of the credit rating of the borrower. One downside to an unsecured loan is that the lender can choose to not approve the loan, leaving the borrower with a large number of unpaid funds.