Know These 5 Things About Commercial Loans Before Applying

Having a commercial venture is a dream for many. While some want to create a well-oiled generational wealth machine, others might just want to enjoy the flexibility of working on their own terms and conditions. 

However, starting a venture on one’s own terms is not easy, especially when it comes to the financial side of things. This is the time when many budding entrepreneurs seek to get commercial loans for their ventures. While commercial loans can solve the problem, being careful about many things is important. Here, we discuss five important factors that you should consider when it comes to commercial loans. 

5 Important Factors To Consider When Thinking Of A Commercial Loan

  1. Commercial loans are not one size fits all: Different types of commercial loans can offer different benefits and features. Opting for a loan depending on your specific commercial needs ensures you get the full benefits without any worries. These loans come with different limits, making them feasible and practical for businesses of all sizes.

    Opting for a loan that you are able to repay is crucial. A higher-value loan will have a higher interest rate. Additionally, instead of stretching a loan for years, focus on repaying it back at the earliest so that you have more financial resources available for other uses.
  2. The purpose of the loan will play a major role: Commercial property loans are available for various purposes related to working and establishing a commercial space. However, the purpose of taking the loan will be used to assess various factors. These are:
    • Low-risk investment: Buying or refinancing a commercial property that can be used for leasing purposes.
    • Medium risk investment: Buying or refinancing a commercial property your business venture for operations will occupy. 
    • Working capital high-risk investment: Used for covering liquidity shortfalls and to operate your day-to-day business activities. 
    • Any other purpose: Considered on a case-by-case basis and will vary depending on the commercial purposes.

  3. You will be required to produce income statements to get your commercial loan approved: Lending policies incorporated by the banks can vary, as there is limited legislation governing commercial loans. The bank can request the following documents to verify the income of the business. Take a look here:
    • Standard loan application form requesting complete information about the business (full doc).
    • Proof that the income is greater than the lease repayment interest amounts (lease doc).
    • You could be asked to provide partial income information and evidence (low doc).
    • Profit and loss forecast statements showing the loan amount will be helpful in generating income that will be directed towards the repayment of loans (forecasts).
    • There’s a chance you won’t be asked to provide any source or proof of income (no doc).

  4. The features being offered by the commercial loan can vary: As every commercial loan is different, it will have different features that will suit your needs. Here are some features that are common throughout the commercial loan segment:
    • Term
    • Documentation
    • Interest-only
    • Interest rate types
    • Redraw
    • Line of credit
    • Additional repayments
    • Capitalised interest

  5. Commercial loans are different from residential loans: If you are looking for a commercial loan, then it is always best to connect with commercial brokers and lenders to get approval on your loan. A commercial loan has different repayment options, interest rates, and tenure. It is always best to not mix your understanding of a residential loan with a commercial loan.

    Seek professional advice and assistance if you are not sure if a certain loan offer is right for you. Additionally, as many small and large businesses apply for a loan during their expansion stage, it is crucial that your venture takes the decision after having carefully assessed its ability to repay the loan along with the interest on time.

In Conclusion

Whether you are looking to take your business to the next level or add more resources, a commercial loan can be extremely advantageous. However, be sure to consider the type of loan your venture needs, the nature of repayment options available and the interest rates you will be paying. If you are unsure about anything, it is always best to take a moment to seek professional help instead of jumping to making a decision in haste.

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