The Essentials of Commercial Lending
At its core, commercial lending is an agreement between a financial institution and a business. The ultimate purpose is to help the business to propel growth. However, entrepreneurs seek out these loans to help them achieve a variety of goals. Some of the more common reasons are for the acquisition of equipment and/or property. A commercial loan may also serve as a line of credit for general operating expenses. For example, this may include accounts payable and short-term loans to meet payroll obligations.
Applying for a Business Loan
Unless you have the savings available to fund your business venture, you will likely need a commercial loan. Funding solely on your own usually only works for those with exceptional wealth. Any reputable commercial lender will advise you to be prepared before seeking a business loan. In fact, the more thoroughly prepared, the better. Being proactive will increase your chances of getting approved.
Therefore, it is important to do some homework before applying for a commercial loan. The borrower should be aware that very specific documentation that relates to their business will be needed. These documents will include several years of financial statements and tax returns. In addition, be prepared to provide your business accounts payable and accounts receivable documents. It is a good idea to have a detailed business plan and any collateral that can be offered up to secure the loan.
The Underwriting Process
A business owner should allow between 60 to 90 days for the underwriting process. This is due to all the appraisals that need to be done. The valuation of your business, environmental concerns where applicable, and a financial audit of your books all must be assessed.
When applying for a commercial loan, the ability of a property or business to make money, and the ability to repay the loan is what lenders look at most.
In most cases, the term of a commercial loan is five years. Due to the cyclical nature of business markets, lenders are generally unwillingly to accept the risk of loans that run longer than the five years. Businesses should also be expected to cover fees related to the loan, such as the appraisal and legal costs.