Commercial Lending and Leasing

Commercial loans in their basic form are a lending agreement between a business and a financial institution or private lender to finance the growth or operation of their business. These loans can be for variety of reasons and come in many different forms to serve a businesses needs. Some of these reasons would include acquiring equipment, purchasing the property for which the business operates from, a line of credit to meet working capital needs, construction, business start-ups, business acquisition, refinancing property or term debt, hard money loans, and more.  

5 Commercial Lending Basics

Application Process

A commercial loan application is much more extensive than a consumer application. While commercial loans are less regulated, the underwriting process is much more rigorous and detailed. Borrowers must be prepared to provide specific documentation relating to their business, including two to three years of tax returns, financial statements,

Cash Flow Factors

With a commercial loan, lenders are evaluating the business or property’s ability to generate income to repay the loan, rather than solely evaluating the individual as one would with a consumer loan. In general, a lender will want to ensure adequate cash flow is available to pay all current debt obligations of at least 1.25x.

Loan Structure

Commercial loan terms are typically 5 years or less, with the amortization period longer than the term of the loan, up to 20 to 25 years. You may be wondering why 5 years? There are so many variables that can happen across any kind of business market within that time span, that most lenders do not want to accept the risk of fixing a commercial loan rate for a longer period of time.

Security

Lenders in most circumstances will want collateral, something of value they can hold as security, in case you default on your loan. Examples of collateral include accounts receivable, equipment, inventory, real estate, and/or a personal guarantee.

Follow Up

Often times, there are conditions that are part of the commercial loan agreement that a business borrower is required to meet after the loan closes. Examples of loan conditions, or covenants as they are known, include maintaining proper levels of insurance, and/or supplying quarterly

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